COVID-19 Vaccines: Light at the end of the tunnel in 2021
2021 is shaping up to be a stellar year for global economic growth and risk assets
2021 is shaping up to be a stellar year for global economic growth and also risk assets, with a range of vaccines - each with their own pros and cons - likely to be approved and available for distribution globally (see link here for more details).
While there are macro risks worth watching out for in the near term, such as economic shocks from a no-deal Brexit, debt defaults by China SOEs, and the sharp rise in COVID-19 hospitalisations in the US, my base case is that these risks will be manageable.
The more powerful dynamic will come increasingly from the rollout of vaccines over next year.
US and Europe to benefit from rollout of vaccines; China less so
My strongest conviction call is for a strong growth rebound in the US and Europe in 2021, following some slowdown in the winter months (see link to my previous article projecting US hospitalisation capacity).
This is because both economies will be first to get access to some of the most effective vaccines for the vast bulk of their population. In addition, their disastrous handling of the COVID-19 virus also implies they stand to gain much more from a large rollout of vaccines.
As a base case, I expect the US to inoculate more than half of its population by the second quarter of this year, and to reach herd immunity around 3Q2020-4Q2020 (see link here for one analysis). Europe looks to be around 3 months behind the US in rollout.
This timeline could be delayed if manufacturing and distribution is slower than expected, or if a large share of the population is unwilling to be vaccinated.
On the other hand, China should see a much smaller boost to growth in 2021 from the introduction of vaccines compared with the US and Europe.
China has already controlled the virus extremely well this year, which has allowed the country to largely reopen its economy including domestic tourism. In addition, policy conditions are turning somewhat less accommodative, with a greater focus placed on maintaining financial stability and controlling risks.
While headline growth in China will no doubt continue to be strong, private consumption will play a larger role in supporting growth in 2021.
Supportive environment for emerging markets
With this global macro backdrop in mind, I expect 2021 to be a supportive year for emerging market assets.
Firstly, the US dollar should weaken further in 2021, which is historically favourable for EM. Real yields (inflation-adjusted) in the US should remain low for the foreseeable future, while the synchronous global recovery that we expect in 2021 is typically followed by more fund flows out of safe haven assets such as the US.
Second, vaccination rates should accelerate in EM from 2H2020, once key developed markets get their "first dips" on the vaccines. This can reduce the burden on hospitalisation at the start and prevent further lockdowns, while later allowing the reopening of domestic service sectors that have been most devastated by COVID-19.
Exports first, domestic demand second, tourism last
While EM as a bloc should do well, I expect different countries to improve at different rates in 2021. I split the countries in EM into three key buckets.
1st group to benefit - Export-oriented economies, especially those leveraged to demand from US and Europe: Those which are leveraged to the global export cycle should see growth picking up first, reflecting the post-vaccination boost to GDP in key developed economies mentioned above.
Singapore, Malaysia, Vietnam, and Taiwan are some of the key beneficiaries in this category.
2nd group to benefit - Domestic-oriented economies which have been able to procure or are manufacturing a range of vaccines: As a generalisation, this group continues to experience high transmission of COVID-19 cases, and have been operating below capacity for some time. While implementation and distribution will be a hurdle, the vaccination process should accelerate by 2H2021.
Key beneficiaries in this bucket include Indonesia, which has been able to procure a range of vaccines, and also India and Brazil, both of which have significant vaccine manufacturing industries.
3rd group and last to benefit - Economies most dependent on international tourism: We think that countries which are most dependent on international tourism will see the weakest growth rebound in 2021. As this point, we do not know whether COVID-19 vaccines can reduce or eliminate transmission, even if vaccines are deemed effective in preventing illness and the effects of the disease. Until this question is fully resolved, we expect international cross border travel restrictions and current testing and quarantine regimes to remain in place. Nonetheless various countries will continue to establish travel bubbles to jump start the tourism sector next year.
Countries in this last bucket include Thailand
Investment and Asset Allocation Implications
The macro backdrop for 2021 lends me to the following investment and asset allocation implications from an Asian investor's perspective:
Overweight Equities
Within Equities:
Overweight US and to a smaller extent, Europe
Underweight China and Japan
Overweight Emerging Markets (excluding China), in particular, Singapore, Indonesia, India, and Brazil.
Neutral Credit
Within Credit:
Overweight High Yield
Underweight Investment Grade given tighter spreads
Strong Underweight DM Government Bonds
Democratic control of Senate will lead to steeper yield curve
Neutral Cash
FX exposure
Hedge weaker US dollar, either directly or indirectly