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Emerging Markets Quarterly Outlook

October 2020*

The Pandemic and the New Inequality

The COVID-19 pandemic risks deepening inequalities between DM and EM economies given the latter’s more limited financial resources and poorer health infrastructure. The discovery of a vaccine could exacerbate these differences further. Variations in the ability to cope with the pandemic represent a key element in our country allocation.

The spread of the pandemic and its economic consequences remain the dominant narrative for markets. Sure enough, the US presidential election, the fiscal cliff, the rise of populism in many countries, the ongoing Sino-US tussle and geopolitical flashpoints of various intensity and gravity get plenty of airtime. But it is the “second wave” (although in some countries it is better viewed as an extension of the initial wave) of COVID-19 infections with the attendant economic consequences that represents the biggest challenge of our time. This is nowhere more true than in emerging markets (EM), where new infections surged by 11.5 mn in Q3, more than tripling the number of infections in Q2 and growing more than three times faster than developed markets (DM). The divergence between EM and DM is even starker in terms of fatalities: whereas they doubled to 260,000 in Q3 in EM, they fell to less than half their previous rate in DM.

This exemplifies what could be the beginning of a new rise in inequality between the two regions. With the exception of the well prepared North Asian nations, EM health authorities struggled to cope with the outbreak of the pandemic (e.g. testing), leading to its rapid spread in densely populated cities and slum dwellings. Similarly, the public health structure (hospitals, equipment) in many places is woefully inadequate. And finally, the room for mitigating policy measures is often more tightly circumscribed than in DM: monetary policy faces issues of credibility, while fiscal policy faces market and debt constraints.

And while developed nations weighed the perceived benefits of re-opening economies against the risk of letting the pandemic spread, this was either an impossibility for EM with large informal sectors (e.g. India) or was such a (economically) vital question that a complete lockdown was never even contemplated (e.g. Mexico, Brazil). This experience made it clear that the trade-off between economic growth and national health is at best a short-term one and is in reality non-existent: some of the most “permissive” countries experienced the deepest economic contractions during H1 (see chart 2).

EM Country Allocation


  Chg -2 -1 0 +1 +2
Asia
 China          
 South Korea -          
 Taiwan -          
 Malaysia -          
 Indonesia -          
 Philippines          
 Thailand -          
 Vietnam -          
 India -          
Latin America
 Brazil -          
 Mexico          
Europe, Middle East and Africa
 Russia          
 Turkey          
 Saudi Arabia -          
 South Africa          

Note: Up/down arrows indicate a positive/negative change in our asset allocation compared to the previous quarterly outlook. A dash indicates no change.

Source: City of London Investment Management

*The publication reflects asset performance up to 30 September, 2020, and macro events and data releases up to 8 October, 2020, unless indicated otherwise.

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The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

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© 2020 City of London Investment Management Company Limited.
All rights reserved.

City of London Investment Management Company Limited (“CLIM”) is authorised and regulated for the conduct of investment business within the UK by the Financial Conduct Authority (FCA), registered as an Investment Advisor with the United States Securities and Exchange Commission (SEC) and regulated by the Dubai Financial Services Authority (DFSA). Registered in England and Wales No. 2851236. Registered Office: 77 Gracechurch Street, London, EC3V 0AS, England.

© 2020 City of London Investment Management Company Limited. All rights reserved.