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As COVID-19 case counts surge in developing nations, the divergence between emerging and developed markets is deepening, as well. Anthony Okolie speaks with Christian Medeiros, Associate Portfolio Manager, TD Asset Management, about the impact of slow vaccination rates in emerging markets.
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Christian, after a pretty decent start, emerging markets have lagged behind the developed markets, what's been happening in these regions?
Thanks, Anthony. Yes, that's the case when we started this year, investors are really optimistic about global reopening and a synchronized global recovery. And as you can see with the chart that I brought, the Green Line shows that emerging markets started the year by outperforming. But the reality that that investors have actually faced is that countries have been forced to take their own reopening in their own stride and based on their ability to get their own vaccines. And it's really been a regional story. It's been a multispeed world. And so we've seen since then that developed markets have been able to vaccinate quicker and as a result reopen quicker. Whereas emerging markets have lagged behind. And so we see again in the same chart, the white line has now elapsed the green line. And so developed markets have actually outperformed emerging markets so far this year by five percent.
So what's been driving this underperformance?
So I think investors are more familiar with this story in developed markets where the US has really outperformed based on an extremely aggressive vaccination strategy that's resulted in many of the US population in the US being fully vaccinated by now, whereas countries like the EU, Japan and Canada have lagged behind and are still struggling with lockdowns. A similar story is playing out in emerging markets where Northeast Asian economies like China, Taiwan, South Korea have had much more successful health policy measures, have been largely open for a large part of last year and this year and they've outperformed just like the US is outperform in developed markets. But in poorer emerging markets with lower GDP per capita, we've seen a very different picture. Despite initial success, we're seeing now extremely high case loads with half of the global daily new cases arising in India as well as Brazil, and also an increasing portion of deaths as well. And it's been a real humanitarian crisis, overwhelming hospital systems and really a nightmare situation for many and a situation that many of us feared at the beginning of the pandemic. And so it's truly a humanitarian crisis, first and foremost. And the reason why we got here is that these populations have had less access to vaccines and it's been harder for policymakers to sustain lockdown's because of such a high cost for the local economies, because of the worst fiscal position of these countries. And it's much harder to sustain those health policy measures. And so as a result, we've seen these emerging markets lag those in emerging markets, that have been able to maintain those health policy initiatives. And so we're really looking towards stronger vaccination into the back half of this year and into next year in these emerging markets. And luckily, economies like Brazil and India do have a lot of domestic production capabilities. And so we're hoping for a recovery and a solution to Medicare in crisis into next year.
And certainly you mentioned the divergence between some of some emerging market countries that some have done better, some have done worse. Can you explain why that is?
Yeah, so for countries like China, Taiwan and South Korea, which are the biggest weights in the emerging market equities index, these countries have been able to do quick, effective and aggressive health policy measures at the start of the pandemic, which has allowed them to maintain relatively open countries internally free of lockdown restrictions and have been able to bounce back and recover back to normal activity much quicker. And so as a result, these countries were able to largely outperform the S&P 500 last year by nearly double. They also had high exposure to global exports, especially manufacturing exports, which led to really strong economic data as well. However, again, poor economies, because of policy, populist and fiscal headwinds, it's been harder and denser populations. It's harder for them to maintain those lockdowns, health policy measures or access to vaccines. And so they've lagged behind into this year.
So what's your investment approach, given this sort of uneven performance in the emerging markets regions this year?
Yeah, we think is really critical in emerging markets, but in regional allocation generally, to take a really tactical approach, need to understand the conditions on the ground, local policy issues, as well as the exposures that you're truly getting when you allocate to these countries. And we think emerging markets don't really neatly correspond to value versus growth narratives that we have in developed markets or cyclical versus defensives because there's different risk factors and because these countries tend to produce goods that are important to the global manufacturing supply chain. And so as a result, what we've instead noticed that our thesis this year, that very strong global global demand hitting tight supply chains coming out of COVID 19 pandemic would result in higher prices. This would be across commodities like oil, agricultural goods, mining, even semiconductors. And so if you've seen higher prices at the pump recently or in renovating your home or in and at the grocery store, this is what we're talking about in terms of higher prices. So we want it to be positively exposed to companies that would benefit from these higher prices. And so traditional traditional commodities like oil, mining, lumber, we've actually decided to take that exposure early this year, be in more developed markets and global companies, as opposed to emerging markets like Brazil, just due to the gravity of the COVID-19 situation, as well as policy missteps by their leaders, made those countries harder to invest in. On new economy commodities like semiconductors, which are key input to many things that you buy, so your computer, your washing machine even and your car, the largest, some of the largest manufacturers are in emerging markets. And these would be Taiwan and South Korea. And a company in Taiwan called Taiwan Semiconductor Manufacturing is one of the biggest producers of semiconductors in the world and a true lynchpin of the global economy. So this is where we've decided to take some of our exposure and maintain it through in emerging markets.
Given all of this, what's your near and long term outlook for tech firms in emerging markets?
Short term or more cyclically into the back half of this year we think that if we do, we are able to have sustained and successful vaccination policies and rollouts, which looks very likely, we're going to see countries that are then left behind begin to catch up and we're going to see what's more of what we call a global synchronized recovery, where many of the countries across the world are seeing accelerating growth and economic trajectories. That situation is a complete Goldilocks for emerging markets because global aggregate demand pushes up demand for the key commodities and materials that they are exporting. And it also pushes down the US dollar, which is also even more beneficial for their exports and more favorable for their currencies and for their fiscal situation. So we think that that is likely if vaccines continue to, rollouts continue to be successful through this year and into next.Longer term, we continue to favor the companies that we've talked about many times with you before, those that are capturing more and more of the digital economy in these emerging markets, whether that be e-commerce, Fintech, ride sharing, food delivery, gaming, they're really capturing the incremental consumer dollar. And these companies have seen a massive pull forward in demand. And I think they've really gained a strong and sustainable market share in emerging economies. So we still favor them. We think that the lesson of this past year, though, is that you really need to be tactical in your regional asset allocation. And you also need to be nuanced. You need to understand the policy risks, the exposures that you're taking on and every week who you decide to allocate to and you can't just see any region as one homogeneous mass. You really need to understand the individual country stories.
Christian, thank you very much for your time.
Thanks, Anthony. Always a pleasure.
Thanks, Anthony. Yes, that's the case when we started this year, investors are really optimistic about global reopening and a synchronized global recovery. And as you can see with the chart that I brought, the Green Line shows that emerging markets started the year by outperforming. But the reality that that investors have actually faced is that countries have been forced to take their own reopening in their own stride and based on their ability to get their own vaccines. And it's really been a regional story. It's been a multispeed world. And so we've seen since then that developed markets have been able to vaccinate quicker and as a result reopen quicker. Whereas emerging markets have lagged behind. And so we see again in the same chart, the white line has now elapsed the green line. And so developed markets have actually outperformed emerging markets so far this year by five percent.
So what's been driving this underperformance?
So I think investors are more familiar with this story in developed markets where the US has really outperformed based on an extremely aggressive vaccination strategy that's resulted in many of the US population in the US being fully vaccinated by now, whereas countries like the EU, Japan and Canada have lagged behind and are still struggling with lockdowns. A similar story is playing out in emerging markets where Northeast Asian economies like China, Taiwan, South Korea have had much more successful health policy measures, have been largely open for a large part of last year and this year and they've outperformed just like the US is outperform in developed markets. But in poorer emerging markets with lower GDP per capita, we've seen a very different picture. Despite initial success, we're seeing now extremely high case loads with half of the global daily new cases arising in India as well as Brazil, and also an increasing portion of deaths as well. And it's been a real humanitarian crisis, overwhelming hospital systems and really a nightmare situation for many and a situation that many of us feared at the beginning of the pandemic. And so it's truly a humanitarian crisis, first and foremost. And the reason why we got here is that these populations have had less access to vaccines and it's been harder for policymakers to sustain lockdown's because of such a high cost for the local economies, because of the worst fiscal position of these countries. And it's much harder to sustain those health policy measures. And so as a result, we've seen these emerging markets lag those in emerging markets, that have been able to maintain those health policy initiatives. And so we're really looking towards stronger vaccination into the back half of this year and into next year in these emerging markets. And luckily, economies like Brazil and India do have a lot of domestic production capabilities. And so we're hoping for a recovery and a solution to Medicare in crisis into next year.
And certainly you mentioned the divergence between some of some emerging market countries that some have done better, some have done worse. Can you explain why that is?
Yeah, so for countries like China, Taiwan and South Korea, which are the biggest weights in the emerging market equities index, these countries have been able to do quick, effective and aggressive health policy measures at the start of the pandemic, which has allowed them to maintain relatively open countries internally free of lockdown restrictions and have been able to bounce back and recover back to normal activity much quicker. And so as a result, these countries were able to largely outperform the S&P 500 last year by nearly double. They also had high exposure to global exports, especially manufacturing exports, which led to really strong economic data as well. However, again, poor economies, because of policy, populist and fiscal headwinds, it's been harder and denser populations. It's harder for them to maintain those lockdowns, health policy measures or access to vaccines. And so they've lagged behind into this year.
So what's your investment approach, given this sort of uneven performance in the emerging markets regions this year?
Yeah, we think is really critical in emerging markets, but in regional allocation generally, to take a really tactical approach, need to understand the conditions on the ground, local policy issues, as well as the exposures that you're truly getting when you allocate to these countries. And we think emerging markets don't really neatly correspond to value versus growth narratives that we have in developed markets or cyclical versus defensives because there's different risk factors and because these countries tend to produce goods that are important to the global manufacturing supply chain. And so as a result, what we've instead noticed that our thesis this year, that very strong global global demand hitting tight supply chains coming out of COVID 19 pandemic would result in higher prices. This would be across commodities like oil, agricultural goods, mining, even semiconductors. And so if you've seen higher prices at the pump recently or in renovating your home or in and at the grocery store, this is what we're talking about in terms of higher prices. So we want it to be positively exposed to companies that would benefit from these higher prices. And so traditional traditional commodities like oil, mining, lumber, we've actually decided to take that exposure early this year, be in more developed markets and global companies, as opposed to emerging markets like Brazil, just due to the gravity of the COVID-19 situation, as well as policy missteps by their leaders, made those countries harder to invest in. On new economy commodities like semiconductors, which are key input to many things that you buy, so your computer, your washing machine even and your car, the largest, some of the largest manufacturers are in emerging markets. And these would be Taiwan and South Korea. And a company in Taiwan called Taiwan Semiconductor Manufacturing is one of the biggest producers of semiconductors in the world and a true lynchpin of the global economy. So this is where we've decided to take some of our exposure and maintain it through in emerging markets.
Given all of this, what's your near and long term outlook for tech firms in emerging markets?
Short term or more cyclically into the back half of this year we think that if we do, we are able to have sustained and successful vaccination policies and rollouts, which looks very likely, we're going to see countries that are then left behind begin to catch up and we're going to see what's more of what we call a global synchronized recovery, where many of the countries across the world are seeing accelerating growth and economic trajectories. That situation is a complete Goldilocks for emerging markets because global aggregate demand pushes up demand for the key commodities and materials that they are exporting. And it also pushes down the US dollar, which is also even more beneficial for their exports and more favorable for their currencies and for their fiscal situation. So we think that that is likely if vaccines continue to, rollouts continue to be successful through this year and into next.Longer term, we continue to favor the companies that we've talked about many times with you before, those that are capturing more and more of the digital economy in these emerging markets, whether that be e-commerce, Fintech, ride sharing, food delivery, gaming, they're really capturing the incremental consumer dollar. And these companies have seen a massive pull forward in demand. And I think they've really gained a strong and sustainable market share in emerging economies. So we still favor them. We think that the lesson of this past year, though, is that you really need to be tactical in your regional asset allocation. And you also need to be nuanced. You need to understand the policy risks, the exposures that you're taking on and every week who you decide to allocate to and you can't just see any region as one homogeneous mass. You really need to understand the individual country stories.
Christian, thank you very much for your time.
Thanks, Anthony. Always a pleasure.
