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Developed Markets Quarterly Outlook

February 2021*

‘Vaccine Nationalism’ Harms Everyone

The discovery of COVID-19 vaccines has not proven to be the panacea expected and markets will have to increasingly internalize the notion that fighting the pandemic requires a long term effort. Nevertheless, despite persistent hurdles, an economic rebound is nearly inevitable and economies will certainly fare better in 2021.

The discovery of a vaccine against COVID-19 was supposed to be a game-changer that would quickly bring the world back to ‘normality’ as we knew it. As such, with eight vaccines approved for distribution in two countries or more, it is no surprise that stock markets kept climbing to new record highs and riskier assets, such as Emerging Markets (EMs), continued to outperform during the past quarter. Yet, markets have also been choppier, recognizing that leaving the virus behind is going to be less straightforward than previously thought.

Chart 1: COVID-19 Infection & Fatality Rates

  Total New Infections Total Fatalities
  Nov-Jan 3m/3m, % Nov-Jan 3m/3m, %
World 56,626,969 99 1,028,300 98
DM 29,060,207 230 463,080 334
EM 13,303,387 14 270,676 11

Note: DM includes Australia, Austria, Canada, France, Germany, Hong Kong, Israel, Italy, Japan, Singapore, Spain, Sweden, Switzerland, the UK and the US. EM includes Brazil, China, India, Indonesia, Malaysia, Mexico, Philippines, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand and Turkey.

Source: Johns Hopkins University

Several issues have arisen. Some factors are temporary and, while likely to be overcome, they risk engendering long-term consequences. A ‘dark winter’ of rising infections was always expected, but the advent of several more contagious variants and their mutations has upended the effectiveness of some vaccines and complicated national immunization efforts. For instance, if immunizations progress in the presence of widespread infections, they increase the likelihood of harmful mutations developing. This is true both within and across countries and is why the emergence of ‘vaccine nationalism’ – while perhaps understandable – is so detrimental. As long as the virus has not been brought under control everywhere, it cannot be under control anywhere; unless international travel ceases completely. What is more, if sufficient vaccines cannot be produced in short order, the world could risk ‘running behind’ the virus forever: already by next year, people may require refresher jabs and/or revaccinations based on modified formulas.

Markets will likely have to increasingly internalize the notion that adopting the vaccines requires a long term effort and they will thus be susceptible to recurrent setbacks following each period of exuberance. What is more, not only will COVID-19 have long term health and epidemiological consequences, but also economic effects. This ‘long economic Covid’ is at least partly due to the damage done to investment and human capital, according to the World Bank.

These issues aside, economies will certainly fare better in 2021 than last year. Despite persistent hurdles, an economic rebound is near inevitable. The IMF forecasts 2021 growth of 4.3% in Advanced Economies, with several G7 economies expected to gain 5-6% according to private forecasters. The IMF’s estimate of 5.1% growth for the US has yet to include the effects of the stimulus program planned by President Biden. Emerging Markets are expected to grow 6.3% this year, despite a mild contraction of just 2.4% in 2020.

*This publication reflects asset performance up to 31 January, 2021, and macro events and data releases up to 10 February, 2021, 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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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.

© 2021 City of London Investment Management Company Limited. All rights reserved.