While much of the developed world appears to be on the road to recovery, aided by the rapid roll-out of vaccines, the outlook for many poorer countries is far less favourable, says Ian Pizer.

The global economy looks to be recovering from the COVID-19 pandemic faster than once seemed probable, with the International Monetary Fund (IMF) predicting six per cent growth in 2021, aided among other things by huge fiscal stimulus, especially in the US.1

There is a big divergence between the prospects for many richer nations and the bulk of poorer ones

That would represent the fastest pace of global expansion in almost half a century. However, the headline figure masks a big divergence between the prospects for many richer nations and the bulk of poorer ones.

The IMF sees US GDP exceeding its pre-pandemic level this year. Although the majority of advanced economies are not expected to pass this milestone until 2022, for many emerging market and developing economies, with the notable exception of China, this is unlikely to happen until well into 2023.

The IMF predicts cumulative per capita income losses over 2020–22, compared to pre-pandemic projections, equivalent to 20 per cent of 2019 GDP in emerging markets and developing economies (excluding China). In advanced economies, losses are forecast at 11 per cent.

Much of this disparity can be explained by stark differences in the pace at which vaccines are being rolled out. Whereas the accelerating rate of deployment across the developed world is allowing more economies to reopen, most emerging nations are a long way from doing so. Indeed, as the tragic events in India and Brazil illustrate, several are still far from being able to declare victory in the battle against the disease.

India has struggled in recent weeks to cope under the weight of an explosion of coronavirus cases. In the week ended May 17, just two months after health minister Harsh Vardhan declared the country was in the “endgame” of the epidemic,2 daily infections averaged 320,000, while deaths averaged 4,100.3 Most experts believe these are substantial underestimates.

Contagion threat?

Concerns have been voiced that the rapid spread of the disease in India and other parts of the world could potentially pose a threat to richer nations, even those well on the way to fully vaccinating their adult populations, as new strains emerge that can evade vaccines.

So far, while it appears some variants reduce neutralisation by antibodies, this is not the cause of the crisis emerging in India. Indeed, evidence from laboratory-based studies suggests the B.1.617 variant now prevalent in the country is less able to evade antibodies generated by vaccination or by natural infection than either the Brazilian or South African variants, P.1 and B.1.351.4

Another lab-based study showed Covaxin, the inactivated-virus vaccine being developed by India’s Bharat Biotech International, is effective in neutralising the new strain and should retain efficacy against the variant.5

Current vaccines remain effective against all currently known strains

This backs up findings from other studies around the world suggesting current vaccines, or at least the mRNA versions made by Pfizer and Moderna, remain effective against all currently known strains.

A recent study in Qatar showed full Pfizer vaccination offered 75 per cent protection against infection with B.1.351, the variant which exhibits the greatest reduction in neutralisation levels in lab tests. While the study showed the importance of both doses to provide protection, and even though this marked a 20-percentage-point reduction from the vaccine’s effectiveness against the original ‘wild-type’ strain, no severe infections were reported. The vaccine also offered 97 per cent protection against severe infection from any variant.6

These findings are supported by evidence from Israel, a country where around 60 per cent of the population had been inoculated with the Pfizer vaccine by mid-May. It has reported several people being infected by the South African variant, but on each occasion the disease failed to gain a foothold.

Separately, a trail by Moderna, designed to measure the immune response of boosters, showed a third dose of its vaccine boosted the immune response to B.1.351 to the same level two jabs did to the original strain. Better still, an updated booster designed to target the South African variant was even more effective.7

Convergent evolution

The challenge of staying ahead of immune evasion is more moderate than might have been feared because SARS-CoV-2 is evolving in a more straightforward fashion than other viruses, such as common influenza. Whereas normal flu constantly evolves in quite a radical way, SARS-CoV-2 is currently exhibiting a process known as convergent evolution. This is where organisms with independent lineages independently evolve with similar traits as they adapt to similar environments.

All the different variants seen to date seem to be drawing from a pool of common mutations

While SARS-CoV-2 is mutating, all the different variants seen to date seem to be drawing from a pool of common mutations. According to one US study, at least seven genetically independent lineages acquired a mutation at one particular spot on the virus’s spike protein, which it uses to latch onto human cells.8

If the same part of the virus repeatedly mutates around the world and becomes more frequent, this mutation very likely encodes an adaptation that helps the virus reproduce and transmit.

Essentially, radically different versions of the virus would have been expected by now if it had multiple tricks to come up with. The fact the same kind of mutations are cropping up around the world suggests the best tricks it has got to offer in terms of single mutations have been seen.

That is not to say combinations will not occur over time that give it a greater advantage, but if multiple mutations are needed for it to gain this advantage, that is a process more likely to be measured in years than months.

Vaccines stay effective

Although the continuous mutation of the virus will reduce the efficacy of current vaccines over time, the genetic sequencing of different strains, along with these trials and real-world data, means there is a growing expectation that unlike normal flu vaccines, both the Pfizer and Moderna shots will remain effective at tackling new strains for several years. Additionally, updated vaccines are likely to be created that remain ahead of the virus.

This in turn should mean richer countries, where vaccines have been deployed widely, avoid the need for further prolonged lockdowns. Elsewhere, however, it looks to be a different story. As the chart below shows, while significant numbers have received at least one dose of a vaccine, poorer countries such as Brazil, India, and Mexico are lagging far behind.

Figure 1: Share of people vaccinated against COVID-19
Share of people vaccinated against COVID-19
Note: This data is only available for countries which report the breakdown of doses administered by first and second doses. Source: Our World in Data, as at May 17, 2021

Moreover, whereas many richer nations have made heavy use of the mRNA vaccines, poorer countries have been left to use others. That is concerning given signs they may be less effective at combatting some strains. For instance, one study, although admittedly small and therefore inconclusive, suggested the AstraZeneca jab offered little protection against symptomatic infection by the South African variant.9

While the expectation is that protection against more severe infections will remain strong, the reduction in protection against more mild infections makes the controlling of infection levels problematic. This may help explain why the current wave in Chile – which has mainly utilised the Chinese inactivated vaccine Sinovac – has continued, even though the country’s vaccination rate exceeded Israel’s when it removed the vast majority of restrictions.

Lower efficacy against mild infection might mean a higher proportion of the population needs to be vaccinated

This is despite evidence the vaccine offers strong protection against hospitalisation. The concern is that a lower efficacy against mild infection might mean a higher proportion of the population needs to be vaccinated to achieve herd immunity.

As for why cases have suddenly exploded in India, there is growing evidence it is because the new B.1.617 strain is even more transmissible than the so-called Kent variant, first identified in the UK and also prevalent in parts of India. Other countries, which have thus far been very successful in containing infection levels and so have very little immunity built up, could be set to follow. Nepal already appears to be experiencing a spike similar to India’s while, further east, Cambodia is starting to see far faster growth in cases, even if they remain low in absolute terms.

Although global vaccine manufacturing capacity has expanded rapidly since the start of the pandemic, the majority of poorer nations appear to be several years from having most of their adult population fully vaccinated. In the meantime, even a rapid acceleration in the roll-out of vaccination programmes will not stave off the need for some countries to employ lockdowns to control case numbers – particularly given the lag in administering two jabs to a significant number of people.

Herd immunity

That said, when one considers the number of cases being reported, and the fact they are likely heavily underestimated, India will be building up immunity that will make it harder for the virus to spread. Studies suggest previous infection offers a high degree of protection for several months.

A UK study of convalescent healthcare workers found that having previously been infected offered 83 per cent protection against reinfection for at least five months.10 Moreover, those reinfected were far more likely to be asymptomatic or suffer mild symptoms than the first time around. Coupled with restrictions on social activity, this means waves such as that seen in India will end long before vaccines are having a material impact.

The successful development of several effective vaccines means the world has the tools to get on top of this disease by tweaking vaccines as and when needed, massively increasing production, and ensuring an equitable distribution of them.

Poorer countries arguably have bigger issues to deal with

Much will depend on the stance taken by richer nations. After all, poorer countries arguably have bigger issues to deal with. Malaria, for instance, is estimated to kill close to 400,000 people a year in Africa, more than three times as many as have so far died of SARS-CoV-2.11 As for India, deaths from tuberculosis totalled 445,000 in 2019, nearly double the 253,000 reported to have succumbed to COVID-19 in 18 months.12

The World Health Organisation’s COVAX programme aims to vaccinate 20 per cent of the most vulnerable people in every country. But a far more ambitious programme is needed to stand a chance of eradicating the disease. Whether richer nations choose to bankroll the effort remains to be seen.

Unless they do, developing nations seem likely to endure an ongoing risk of further waves for many years. As for developed nations, most economic sectors seem set for a return to normality with one exception: international travel and tourism. Even in the West, a return to the kind of open borders that preceded COVID-19 looks some way off so long as the disease is circulating in other parts of the world.

While the global outlook may have improved, transmission patterns of the virus and the pace at which vaccines are rolled out are likely to have a big say in how individual economies perform this year and beyond.

Market implications

In a period of sharp economic growth, one would usually expect emerging market equities to outperform. Not this time. The risk of a future wave of infections will weigh on sentiment for far longer than in developed markets. Moreover, these countries have far less flexibility when it comes to deploying monetary and fiscal support to cushion the economic hit of the crisis and drive the recovery.

The outlook for developed equity markets looks brighter given the anticipated rapid economic growth. Although the most positive environment for equities seems behind us, rising earnings should still outweigh the impact of higher real interest rates.

The risk of a future wave of infections will weigh on sentiment for far longer than in developed markets

As for developed bond markets, we expect yields to rise further as investors continue to adjust to the improved economic outlook. With policymakers explicitly adopting an increasingly pro-inflation stance, fiscal policy in maximum stimulus mode and suppressed household spending potentially returning rapidly, elevated inflation presents a growing threat not just to government bonds, but other asset classes too.

In emerging market debt, the sustainability of fiscal positions is likely to come under more scrutiny. The risk is that where a renewed wave of infections causes a country to impose curbs on economic activity, investors quickly judge it to be in danger of default.

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our Privacy Policy.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.

Related views