Coronavirus and emerging markets: A three-tier challenge

But while securing vaccines is one issue, another is overcoming supply constraints and being able to actually administer the doses. Here again there has been huge variation across developing countries. Some have made excellent progress, with Israel leading the way globally, having now vaccinated over 50% of its population, closely followed by the United Arab Emirates at around 35%² .

However, most EM countries are lagging behind the vaccination levels in developed markets and many are not expected to achieve a 50% vaccination rate until late 2021. For example, despite securing a large order, Brazil has currently only received eight million doses for its 213 million-strong population, with 100 million doses negotiated with AstraZeneca not expected to be delivered until July.

There are additional factors for investors to consider such as how ready healthcare systems are to deliver mass vaccination, and the willingness of the population to accept it. Here EMs may have an advantage given the typically heightened awareness for vaccinations in areas such as Africa, while certain countries such as Brazil also have a good history in this field.

In addition, other vaccines such as those from Novarax, Johnson & Johnson and Russia’s Sputnik V are also entering the picture, and there are currently reported to be over 10 vaccines in Phase 3 trials which may help to improve supply. Meanwhile China has been publicly quiet on its vaccination policy and trials are fragmented at this stage. Given its industrial power and manufacturing capacity, many EM countries are looking at China for a cheap and available alternative in the coming months, which may also help to improve access to the vaccine.

What does this potentially mean for investors?

These variations in supply and potential for rollout emphasise the need to assess the EM debt universe on an individual basis and for investors to closely watch the rate that each country is able to administer the vaccine. For example, countries highly dependent on tourism may continue to suffer if they are unable to reach high vaccination levels and travellers do not feel safe. Domestic consumption is likely to be highly variable depending on what sectors can open up, how many people can gather and so on. The resumption of developed market growth will also be key as EM exporters to these countries could potentially start to benefit if production begins to ramp up.

We continue to have a preference for debt issued by corporates in higher/middle income countries that are well resourced and can potentially expect to return to higher levels of mobility sooner. We are very selective in lower income countries given their challenges in rolling out the vaccine, and prefer those supported by multinational organisations. If mobility is able to pick up in emerging markets as the rate of vaccination increases, this could potentially provide a big boost to market sentiment that could continue to drive flows towards the asset class and elicit further spread tightening in the first half of 2021.

The chart below shows how investment flows into – and out of –  emerging market debt has varied during different episodes of volatility. For example, the start of the 2008-09 global financial crisis was marked by a steady stream of outflows. However, during the coronavirus pandemic outflows have reversed significantly since the development of vaccines, indicating a significant swing in sentiment.

Finally, as economies begin to recover this should put some upward pressure on inflation and allow emerging market central banks to begin to normalise monetary policy, paving the way for asset purchases to begin to taper and interest rates – and therefore bond yields - to eventually slowly rise.