• Multi-Asset & Macro

For richer, for poorer? Post-COVID economic fortunes likely to diverge

The global economy looks to be recovering from the COVID-19 outbreak faster than once seemed likely. However, a big divergence in prospects is emerging between richer and poorer nations.

For richer, for poorer? Post-COVID economic fortunes likely to diverge

According to the IMF, the US economy is expected to exceed its pre-COVID level this year. The majority of advanced economies are not expected to pass this milestone until 2022, but for many developing economies (with the notable exception of China) this is unlikely to happen until well into 2023.

Much of the difference can be explained by the pace at which vaccines are being rolled out. While vaccines are being dispensed at an accelerating rate across the developed world, allowing more economies to reopen, most developing nations are a long way behind. India and Brazil in particular are struggling to contain the disease.

Vaccines the key

There are concerns that the rapid spread of the disease in India and other parts of the world could 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. However, the evidence suggests this is not a major threat. It is likely that current vaccines will remain effective at tackling new strains for several years. Over time, updated vaccines are also likely to be created that will contain the virus.

The majority of poorer nations appear to be several years from having most of their adult population fully immunised

This should mean that richer countries, where much of the population will have been vaccinated, will avoid the need for further prolonged lockdowns. By contrast, the majority of poorer nations appear to be several years from having most of their adult population fully immunised. Moreover, developing economies are more reliant than richer nations on vaccines that may be less effective at combating some strains of the virus.1 Even a rapid acceleration in the rollout of vaccination programmes will not prevent the need for some countries to employ lockdowns to control case numbers.

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

Furthermore, 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 supplies are distributed fairly. Much will depend on whether richer nations choose to bankroll the vaccine effort in poorer countries. Unless they do, developing nations seem likely to endure an ongoing risk of further waves of the virus for many years.

The impact on investors

In a period of sharp economic growth, one would usually expect emerging-market equities to outperform their developed-market counterparts. Not this time. The risk of a future wave of infections will weigh on investor confidence for far longer than in developed markets. Moreover, the authorities in these countries are less able to boost their economies than their colleagues in the richer world.

The outlook for developed equity markets looks brighter

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 profits should still outweigh the impact of higher interest rates, when inflation is taken into account.

As for bonds (IOUs issued by governments, companies and other organisations) in richer countries, we expect prices to fall further. That is because rapid economic growth in these countries could trigger a rise in inflation. This, in turn, could cause central banks to hike interest rates to try to cool the economy (and inflation), which would undermine the appeal of the fixed income provided by bonds.

The prices of bonds issued by governments in emerging markets could come under particular pressure if the scale of government borrowing and overall debt rises to levels that alarm investors.

Three points to remember

  • The economies of richer nations are recovering much faster from the impact of COVID-19 than poorer ones, and the trend looks set to continue.
  • This divergence reflects the much slower pace of the vaccine rollout in developing economies and their reliance on vaccines that are not as effective in combating the disease.
  • Consequently, the outlook for equities and bonds in advanced economies is also brighter than in the developing world.

Related views

Important information

THIS IS A MARKETING COMMUNICATION

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. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

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, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. 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: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

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 27, 101 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 based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

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.