An update from the manager Andrew Lister
In this podcast we are joined by Andrew Lister, manager of Aberdeen Emerging Markets Investment Company. Here he discusses the opportunities in emerging markets today and how they're being reflected in the Trust's portfolio. He also discusses the global economic recovery and its impact on emerging markets.
Recorded on 14 May 2021.
Discrete performance (%)
|MSCI Emerging Markets||35.5||(9.1)||0.3||14.3||34.9|
Total return; NAV to NAV, gross income reinvested, GBP. Share price total return is on a mid-to-mid basis.
Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.
Source: Aberdeen Asset Managers Limited, Lipper and Morningstar.
Past performance is not a guide to future results
Cherry Reynard: Hello, and welcome to this Aberdeen Standard Investment Trust podcast, I'm Cherry Renard.
Today I'm talking to Andrew Lister, manager of the Aberdeen Emerging Markets Investment company. We'll be discussing the opportunities in emerging markets today and how they're being reflected in the portfolio. Welcome, Andrew.
Andrew Lister: Thank you very much.
Cherry: Now, today, it seems that emerging markets are, on the one hand, they're benefiting from global economic recovery. But they're also contending with some wealth like crises on the other. I was wondering if you could give us a big picture view on the state of emerging market economies today?
Andrew: Yeah, I think you're generally right with the question, they are definitely benefiting from the economic recovery and post COVID the world is a high growth place and that has to be positive for emerging markets. So yes, definitely participating in the economic recovery and that's been reflected in performance since the lows of March last year.
In terms of the crises, I mean, I'd say they're probably not really crises, but they're certainly plenty of headlines around as there always is in emerging markets and the kind of topic that investors are concerned about today. The big one is obviously, you know, something of a clampdown going on by regulators in China with regard to technology companies, which has had a big impact on their performance so far this year, and then also flashpoints of either politics or COVID related news in markets and economies like India, Brazil, or Turkey. So yes, the usual balance of risks and opportunities. But we think definitely more opportunities than risks at present
Cherry: And which countries are likely to be the strongest beneficiaries of the recovery. I mean, you’d assume it would be the commodity producers - but is it more nuanced than that?
Andrew: I think it's a bit more nuanced than that. I mean, certainly that's been a trend that has been playing out in the last kind of six months or so which is near to the end of April, I'm talking about what has been a very interesting period, because you have seen a very sharp reversal of fortunes between the markets that performed very strongly initially in COVID, because they had dealt with the pandemic well, and quickly got back on track for growth very rapidly, and the performance of those that suffered, perhaps a more drawn out pandemic, that are still suffering from rising or substantial number of cases.
And almost coincidentally, those two things do map on to commodity and energy countries. So the strong response from China, Taiwan, Korea, which also happened to have those technology names that I've already referred to, versus the likes of Russia, the Middle East, Latin America, Africa, which tend to be more commodity driven, as you say, and also have generally had a more difficult pandemic. So ,the last six months, you've seen a very sharp rotation actually in performance between the commodity producers and exporters and the likes of China and China being the standout market, which really hasn't gone anywhere for the last six months, which is a little surprising. So yes, we are seeing at the moment, that higher energy prices, high commodity prices are benefiting some of those more cyclical markets, which also happened to be value markets, more value markets, so it's really been a perfect storm for some of those economies in that you've had value outperforming growth, you've had commodities and cyclicals outperforming non cyclicals and that has really favoured markets like, for example, Mexico, Brazil, South Africa, Russia and parts of the Middle East, which performed extremely strongly of late.
Whether that continues or not is anyone's guess. But certainly, if commodities continue to trend higher, based on the rapid recovery that's being priced in post COVID - we're obviously not there yet but it's certainly been priced in by markets - then you'd expect to see those more cyclical commodity related economies continuing to perform well. Not least because they finally have some contribution coming through from their currencies, so, it's not just the commodity companies that are benefiting, it's the currencies that are in those countries that have been strengthening and adding to your returns in the recent past.
Cherry: And against that backdrop, how have you adjusted the portfolio? I mean, are you trying to keep a balance between the two sides or are you, have you been positioning for recovery?
Andrew: We haven't adjusted an awful lot. I mean, we were positioned for the performance of the last six months, prior to the last six months. So we had, you know, we took some pain and then the last six months have actually been very good for us.
So, we are overweight - Europe, the Middle East and Africa. So markets like those I've just mentioned Russia, Sub Saharan Africa, the Middle East, and we have been underweight China. So, we haven't had to reposition, we're pretty happy with the way things have been playing out recently. And we haven't, you know, all we've really done is taken some profit, actually.
So, the emerging markets were incredibly strong at the very start of this year. And they peaked kind of towards the end of February. So, we were fortunate to take some profits around that time to pay down gearing. So actually, that's really the only change we've made to the portfolio is to take a little bit of risk off towards the end of February, beginning of March. Now, obviously, markets have softened a bit. And, and we're looking at, you know, how we might put some of that liquidity back to work.
Cherry: And looking a bit longer term, in the past few years, it's been very, very much China and these big tech names that have led emerging markets higher, that's kind of changed more recently. But on the other hand, you feel that, in the longer term, some of these big tech names may be kind of beneficiaries of the different landscape that emerges post COVID. So where are you on those kind of ‘big China, tech names’ - you said you were underweight China overall there, but what's your longer term view?
Andrew: So, the way we invest our fund, we tend to be underweight with the largest stocks in the index, almost as a structural result of how we invest. Allocating to active stock pickers in emerging markets, you know gets us a significant overweight to small and mid-caps, and that's been a pretty consistent position for us over the very long term.
So, we're underweight some of those technology names more by virtue of the way our underlying managers invest, rather than because we have a negative view on them. I think what's happened is, is a little bit of a reality check, you know, these companies are not going to be permitted by the Chinese authorities to branch out into every aspect of your man on the streets life. It's one thing to sell products to them, they get delivered to their doorstep, or to be the means by which they communicate with their friends. But I think the clamp down you're seeing now is really saying that doesn't permit you to start other lines of business - financial in particular, for example, personal loans has been a real area where the government is trying to clamp down.
So, we think it's just a bit of a reality check. We just certainly don't think these companies have gone ex-growth, you know, they're huge, well run companies. But certainly, valuations had run up to a meaningful extent, helped by the fact that in China, you know, you had this country that had dealt incredibly well with the pandemic, which attracted a lot of capital. And so you're really just having, you know, a pullback. It's a meaningful one, it's about 30%, from recent peaks for many of these companies. But we certainly don't think it's the fact that these companies have gone to ex-growth.
So, we maintain a balance. We prefer - all else being equal - to buy companies that have attractive growth at attractive valuations as well. So, I do think the emerging market universe is broad enough, is deep enough that you know, you will always be able to find opportunities where you can have both - where you can have your cake and eat it of buying companies that grow very nicely over the long run, possibly the dividends, and that also trade at undemanding valuations which have scope to expand in the future.
And I think that the rotation you've seen is partly reflective of that, that just some of the areas we've already talked about cyclicals, financials, mining energy, you know, they've been pretty unloved places for a considerable period of time in emerging markets, so it's good to see them having a burst of life, but again, doesn't mean that's going to continue indefinitely. I think what's healthy, though, is that you know, the returns are broadening out from just that very small cohort of tech names in Asia. And reminding investors really that there are other things to buy in emerging markets. And you should probably have some exposure to a lot of what's out there rather than just focusing on a very narrow opportunity set in a single market.
Cherry: Okay, and on that. I mean, are there any other themes that you'd highlight in the trust today?
Andrew: Well, I think as I said, we're, we're happy with the way we're positioned. I think we're particularly happy with the exposure we have to small caps of the moment because we think that is a very rich seam of investment opportunity for active managers. And you know, with that backdrop that we've already discussed, you know, we do think it's a very good environment for active managers, stock pickers, in this asset class at the moment to be to be poring over the things that are less well researched, less well covered by analysts and, you know, digging out laggards or simply mispriced opportunities where, you know, perhaps companies have had a much better experience in the last year than the market is giving them credit for. So, a bit of volatility helps in that regard, because your active managers can benefit from that volatility, we've certainly had no shortage for that in the last year, so we think small caps are a very interesting area of the market. They, like everything else ex- tech, have been underperforming and have really gone sideways for a number of years. So in a world where equities at large look expensive across many of the developed markets, you know, we think that's somewhere that people can kind of really look forward to generating some good returns almost irrespective of what happens in the rest of the world.
Cherry: And emerging market dividends were reasonably resilience last year, I think, certainly compared to UK dividends. What's the outlook there? Do you see a reasonably healthy year ahead?
Andrew: Yes, I think so. I mean, all the evidence to date is that they're bouncing back very quickly. As you mentioned, yes, the UK, the average UK investor can certainly benefit from some diversification into emerging markets if they're looking for income. And so, we're seeing very much that it's still going to be an asset class that you can invest in for yield, you know, 3 to 4% is quite achievable in emerging markets, that should be a 3 to 4% that grows over the long term, which is what you want as a dividend investor, and you should be able to catch some capital gains as well. So we still think the income argument for emerging markets is a very strong one. And what's interesting at the moment is that actually, as bond yields come down around the world, for local investors in emerging markets, equities are looking attractive as well. So, you know that the fact that locals will likely be buying more equities going forward is also, you know, another underpinning for the, for your capital value in emerging markets.
Cherry: And the volatility inherent in emerging markets can be something of a deterrent for investors, how can investors go about managing that, that volatility? Is it, you know, incorporating fixed income or, you know, putting regular savings in the market? Or what would you suggest?
Andrew: Yeah, you’ve beaten me to it. So those two things would be number one and number two. Certainly, it's, it's an asset class that lends itself to that kind of drip of a regular savings approach. So, I have the same into this fund, it goes in monthly, and it builds over time, and certainly helps to dampen the volatility. If whilst you're doing that, you're also reinvesting the dividends, then obviously, you're buying irrespective of whether the headlines are positive or negative. And I think that's a very handy kind of arm's length approach to have where you, you take out some of the emotion of it, and money goes in, even if you look at last year, you would have been buying the asset class right at the March lows, because you've got that in place. And then also Fixed Income, you know, fixed incomes had quite a difficult time in the last six months in emerging markets. And you're now looking at yields of 4 to 5%, quite achievable. And very deep markets, actually, for sovereign bonds and corporate bonds in emerging markets now. So, combining an element of that, as well will certainly dampen your volatility, and same applies - no reason you can't buy that, you know, on a monthly basis or with reinvesting your income.
Cherry: Right, okay and then, just finally, I wonder if you can talk a bit about how you're feeling about the year ahead. Whether you're optimistic, the kind of risks you're monitoring?
Andrew: Yeah, sure. So, if you'd asked me eight weeks ago, I think it would have been quite a different answer. You know, at that time, emerging markets were outperforming developed markets very significantly year to date. And there was a huge amount of optimism and capital actually flowing into the asset class. That's really cooled down in the last couple of months, not least, because of what's going on in China, but also resurgence of COVID in some of the markets like India and Brazil.
And so at the moment, you know, we see the asset class looking a little bit unloved again, and we think that's always a good time to be putting more money to work. It's certainly reflected in the discount that the trust is trading on at the moment, which at about 14% to NAV, I think is extremely good value, as I said that dividend income is not going away anytime soon, so the Trust yields 3%. And we think the valuations are more attractive, as I said, particularly if you're willing to do the hard work of finding those more unloved regions of the world where valuations you know, range from attractive to frankly compelling. So we think there's plenty to be positive about. We don't see any reason why if the global economic recovery continues as being priced in by markets, that emerging markets participate very fully in that growth and that recovery, so I would say optimistic for the rest of the year.
Cherry: Okay, great. All right, thank you, Andrew, for your time today and for those insights. Thanks to our listeners for tuning in. You can find out more about the Trust at www.aberdeenemergingmarkets.co.uk and please do look out for future podcasts.
Emerging markets and the Covid crisis update
How have emerging economies weathered the Covid storm? In this Macro Matters podcast, we look across Latin America, Russia and Asia to understand the different challenges facing emerging markets along the road to recovery. Our host Stephanie Kelly is joined by two of our Emerging Market Economists from the ASI Research Institute, Robert Gilhooly and Edward Glossop. Together, they discuss the Covid crisis from the perspective of emerging markets and the implications of the crisis on future growth prospects.
Macro Matters: emerging markets and the covid crisis
Hi, and welcome to Macro Matters. My name is Stephanie Kelly, and together with my co-host, Paul Diggle we'll be guiding you through the complex world of politics, economics and markets. We spend quite a lot of time on the podcast recently talking about what COVID means for major markets in the developed world. We talk a lot about the US, we talk a lot about Europe and the UK. But what about emerging markets? How have they fared through this crisis? And what will the short and long term impact be on things like economic growth and on political risk? To help me answer those questions today, I'm delighted to be joined by Bob Gilhooly, our senior EM Economist at Aberdeen Standard Investments, and Ed Glossop has just joined us as our EM, economist. Thanks both for coming on the show.
Thanks. Great to be here.
So let's kick off just by talking about the EM experience of the COVID crisis overall. So how have the challenges of emerging markets differed from developed markets on those kind of key COVID issues, we talk about vaccines and health systems and economic damage? Maybe, Bob, I'll go to you first.
I mean, I guess kind of fundamentally, many of the challenges are kind of the same between EM and DM, but I think we'd see that the tools that they have to face these challenges are often quite a bit weaker. And you know, the trade offs themselves can be a bit kind of Starker and harder to manage. So I guess kind of right, rightly or wrongly, many emerging markets, like developed markets have been kind of trying to balance the strain on health care, versus the economic damage, that imposing restrictions to control the virus causes. And the ability to emerging markets to provide economic support is typically much more constrained, though, making it much harder to kind of lock locked down forcibly. We turn to health care, the health care strain is, you know, it's clearly a function of, of both the quality of health service, which can vary massively across the EM landscape and case loads. And, you know, we've done a bit of analysis looking into this, in Latin America and Eastern Europe tend to actually kind of outspend and outrank emerging Asia, for example, in you know, kind of measures to Universal health care provision, kind of numbers of medical staff kind of skill to to population, but the strain overall in Asia has has clearly been, you know, much lower overall, reflecting the ability of the authorities within Asia to manage the virus much more effectively. So emerging Asia generally actually outperformed and even outperformed the US and Europe. Because of this, in the short run, economic damage reflects, you know, the severity of restrictions and structure of the economy, it can be quite hard to judge how tightly restrictions are an emerging market, in practice, it can be a bit of a gap between the kind of rules and the actual enforcement. And this might be a bit wider in emerging markets than developed markets. And emerging markets tend to have a higher share of informal workers, and also higher shares and manufacturing and agriculture to develop markets, which changes I guess, the nature of the shock, you know, when you're adding up the kind of various sectoral impacts across the board. Really, only time is going to tell how bad the long run damages. But given more limited access to vaccines, EMs on the whole are facing a longer duration shock, and one where it's more difficult to kind of provide the fiscal or monetary support that goes along with it. So really kind of raising the risk of think of greater damage. I mean, it does, of course, vary hugely across EM. Some high income, emerging markets, specifically Israel, also Chile, are actually doing pretty well, in vaccine procurement. You know, Russia and China also stand out a lot benefiting from the role of vaccines and manufacturing capacity, but many emerging markets where they are still to secure enough vaccines to even kind of try to cover their whole population.
So there's quite a lot of stuff in there that I'm actually keen to do just a little bit of follow up, and then I'm really keen Ed to bring you in as well. One is, I guess, you mentioned EM Asia coping particularly well, and is there any kind of evidence that they've benefited from having been through previous pandemics or like I'm thinking of SARS? I mean, was that an important marker? And I guess the other question, which is quite a popular headline is that there's a kind of a demographic dividend for emerging markets with younger population has that is that borne out in the in the evidence?
I think i'd probably put more weight on the first question. So I think emerging markets in Asia, you know, they had learned quite a lot from the experience of SARS, the kind of steps that might be necessary to kind of control it, and act quickly. So, you know, they kind of had a playbook for what to do in this scenario. Whereas I think it probably be fair to say that most European countries or the US didn't really have a ready-to-go action plan. I think the demographics one, you know, maybe the jury's still out a little bit on this. I think if we went back a year or you know, a bit more than a year ago, one of the big discussion points was, okay, well, will this virus really even have a big effect in emerging markets? Some countries, particularly India, have got very young populations? Will they even bother kind of locking down? to begin with? So I think maybe it's given them a little, a little bit of extra protection? But I think, if you take it up, take a bit of a step back and think about Okay, well, you know, many emerging markets are not that dissimilar, or some emerging markets are not similar to kind of developed markets and they both had fairly terbulant times. So I think demographics are has got a bit weaker, through the course of COVID.
Sure, sure. No, I think that makes a lot of sense. I mean, you talked a little bit, Bob, about those countries that have outperformed during this crisis and what's driven that? And when you look at the kind of, you know, the lower rankings, which countries have really struggled during this crisis? And what were the kind of factors you think made them so exposed to this particular kind of pandemic?
Yeah, that's a good question. I think the region that's probably struggled most although you wouldn't see it in the COVID cases data, is probably the very low income ends, like those in Sub Saharan Africa, where, you know, we have very low levels of testing, test and trace, but but there are suggestions that access data, you know, very high. And, you know, lock downs in these in low income EMs are much less feasible with no with larger households makes it harder to isolate. And, as Bob alluded to earlier, you know, lockdown is can be much harder to enforce with large shared informal workers. And also, these are the OEMs, with very, very severe fiscal constraints sometimes do sovereign debt problems, etc. And, of course, these low income EMs are late to the vaccine rally as well, because of slow delivery through the covax system and low levels of procurement. Among the kind of more middle income EMs, in that there has been a lack of fiscal support in places like Mexico and Colombia, where fiscal positions are generally quite robust, at least compared to some EMs governments are very concerned about their credit rating. So that's constraining them in that respect, and of course, in a lot of these countries, positive test rates and excess deaths, these kind of alternative measures of how the vaccine the virus is spreading, given the lack of testing are very, very ugly, some of these data releases. So economically that is weighing on GDP and the economic recoveries.
So that's really interesting what you just said there about country ratings, because I just had never thought about that that would be going into the decision making that happens around COVID. Again, this is my very strong develop market bias kicking in here that, you know, countries were willing to just just spend their way out of the crisis in, you know, European countries in the United States. How big of a constraint is that? Then in emerging markets? I know you've mentioned a few Is that something you see quite widely or is it that specific to places like Mexico?
I think you do. I think there was a certain degree of EM's showing some maturity during the crisis at the height of the pandemic last year. We did see some quite large fiscal stimulus packages in the end in some EMs compared to the past standards compared to the global financial crisis, for example. But I think this year, certainly that there are signs that, you know, the sort of old constraints, if you like, are starting to bite in the end, you've seen a rise in US Treasury yields. And that is that's causing some EM central banks to start tightening monetary policy or think about tightening monetary policy. And of course, that's also pushing up government borrowing costs in the end as well. So I think Colombia and Mexico are quite unusual, I would say in that they are very concerned about their credit rating and what downgrades might do to the borrowing costs. But think in general, you know, EM dollar bond yields have risen so far this year, and that that will be another constraining factor for EMs and we're likely to see fiscal policy be less supportive this year than last year.
Well, that's actually almost partly answered the next question I was gonna ask you, which is around how the interaction is between developed markets and emerging markets. And in particular, I mean, what are the key things that you're looking for in develop market policy that will matter for emerging market outcomes? You mentioned a couple of them there. Are they the kind of key factors that you're looking for? Are there other elements that you're you're kind of keeping a close eye on?
Yeah, so that's one factor that we have. This this rise in US yields and, and that's causing financial conditions in some emerging markets to tighten, causing some central banks to raise interest rates, and, you know, impacting fiscal plans, in terms of policymakers starting to unwind some of the fiscal loosening. You have to trade that off against the fact that, you know, ordinarily, we would say that stronger US growth, further fiscal stimulus would be positive, would create positive spillovers for some EMs, particularly places like Mexico, where exports to the US about 25% of its GDP, which is very large places like Costa Rica too, very huge figures here and in terms of their reliance on the US. But I think it's worth bearing in mind, though, that it's actually quite nuanced, because we've done some work in the Research Institute in ASIRI to suggest that US goods consumption is actually, may have peaked. And so even with this fiscal package coming through much of that extra spending may well take place in services rather than consumer goods imports. So that is a reason to essentially expect the spillovers from stronger growth in the US to be perhaps more modest than in the past.
It's interesting, you mentioned the kind of services goods trade off, because, Bob, I know in your initial kind of discussion of the ways in which EMs were affected by COVID, the kind of lower reliance on services as kind of a source of economic activity in emerging markets compared quite sharply to DMs, where we know services, and the fact that restaurants have to close and all that kind of stuff has really been a constraint on growth. This almost sounds a little bit like some of the factors that have constrained growth in developed markets as COVID kind of result or you know, as COVID cases fall vaccinations rise, and you get reopenings, that the bounce back in services won't necessarily then have a positive spillover to EMs, as a result of the fact that they're not really tied in. There's no tie in necessarily with those services firms in the way that there are in goods manufacturing supply chains.
Yeah, I think Steph has pretty much nailed it. I mean, as well, if you can think about the path of the of the crisis, we will actually pleasantly surprised following emerging markets, the global trade, okay, yes, there was kind of shutdowns, which led some very, very sharp contractions, in some countries abilities to export. But actually, once they got kind of past that initial stage, having, you know, a relatively large share of your economy being manufacturing or exporting, when you've got this big rotation of consumption, within developed markets, away from services and towards goods as well, no stuck at home, we need more IT equipment, but to get our kids more iPads and laptops to work to do home schooling, and just entertain ourselves, I guess more generally, as well. You know, I think that kind of has propped up emerging markets, you know, definitely through kind of the course of 2020. But, you know, as Ed was saying, there's a flip side to that. Is normalization in developed markets, that kind of that kind of unusual dynamic that we've seen over the course of COVID is going to unwind in one way, one way or another.
Yeah, absolutely. Gosh, it's, it's really quite striking. I guess the relationship that there is between emerging markets and developed but also the extent to which emerging markets are somewhat on their, outwith supply chains, you know, their experience of COVID was separate. And that's where I kind of want to draw on as well, the political element. Again, we talk a lot about politics on this podcast, particularly, I often have guests on to talk about US politics, European politics, UK politics, but I'm really keen to understand actually in emerging market space, populism has been this challenge for investors in developed markets in recent years and kind of ever-present question of is populism in developed markets, but actually, it seems like emerging markets face significant issues with authoritarianism and populism too. How different is I guess the experience of populism in emerging markets? Maybe, Ed, I don't know if you want to take a first go at that?
I think I think there are some similarities in terms of the drivers of populism with DMs not least, kind of weak economies. But I think I think with with EMs there are very specific issues. And one of them is just simply the income convergence with the developed world, if for many countries hasn't happened over the past 10 years, we had a period of convergence in the 2000s. But that, particularly within the commodity producers, because of the commodities boom, and that really proved to be a one off. So living standards in a lot of emerging markets have actually fallen relative to the US over the past 10 years. And, you know, against that backdrop, we also have like a general disenchanted with political classes, inequality has risen as measured by the Gini coefficients. And I guess all this reflects the idea of, as I say, the 2000 rupee, or one off period where there was exceptional growth, partly because of the commodities boom, but partly because the EM's really picked, picked some low hanging fruit in terms of performed in the 1990s and the 2000s. Inflation fell sharply, policymakers cleaned the balance sheets and banking sectors. And now we EMS really, you could argue we're facing a period of you structurally weaker growth and need some more structural reforms are fair to, you know, stand a chance of converting with US living standards. Of course the EM world has two of the most controversial populists in Bolsonaro in Brazil and Lopez Obrador AMLO in Mexico. And, you know, peculiarly, if Bolsonaro is obviously a right wing populist, AMLO left wing, while they're on different sides of the political spectrum, it's interesting that both have tended to play down the COVID crisis, and the efficacy of masks and lock downs, etc. And I think it's hard to argue that against the fact preventing these two countries from getting control on the virus, and I probably seems to be playing down the various males were playing a role in disappointing vaccine rollout, because policy makers haven't placed a lot of emphasis on vaccine delivery.
That's super interesting. And I like that you pointed out this thing, which is that people always assume particularly when I'm covering in developed markets is up populism is this like, catch all phrase for kind of, I think what people really associate in developed markets with like authoritarianism. It's like, there are left wing populists and right wing populists, and the policies look quite different. I'm really keen to have a bit more of a chat about Brazil actually. Particularly, I guess this question of whether Bolsonaro being reelected will be good or bad. But maybe before we get into that, how have the political systems in emerging markets affected COVID outcomes? I'm so you've you've kind of touched on, particularly the impact it's had on kind of vaccines? Maybe Bob, you know, particularly in China, how do you how do you see, I guess, the role of the political system, which is so different in China, having affected its path when it came to COVID?
Yeah. Next step, you know, I think it's definitely the case that the different political systems have affected the COVID outcomes and economic outcomes. I think looking at it, China's public state apparatus and state capacity, do look like they've paid off. What looked like quite a draconian response initially, and has been followed on, you know, still with with a kind of zero tolerance regime, since then, has has kept Covid cases at fairly negligible levels. And as a result the Chinese Communist Party has been very much pushing the message at home and abroad, this is a benefit of the Chinese governance model. They, of course, wouldn't use the term authoritarian as probably a debate for another time. I think, whether this tells you much about the merits of authoritarianism. Let's take a couple of counter examples. Australia, New Zealand had fairly negligible case numbers since October too. The Philippines, which has kind of shown some signs of becoming increasingly authoritarian, is that one of the weakest economic recoveries today out of all kind of major emerging markets. So you know, maybe it tells us a bit more about kind of either societal preferences, kind of reflecting the individual versus the collectiveness collective and also kind of relatedly I guess, the willingness to use kind of technology for monitoring and controlling COVID itself you know, clearly I think authoritarian states do have somewhat of a penchant for using technology for monitoring.
That's such an interesting point because I think that that exactly as you said, it's not just as simple as, you know, labeling a society authoritarian or not. But it is there is an interesting question which is, Are there certain kinds of political systems that are more willing or able to impose quite stringent lockdowns? Because that seems to be stringent lockdowns, very effective track and trace, when you named the countries, even New Zealand and Australia, you look at those countries, what you see is countries that have been really effective in terms of actually having very aggressive lockdown, very aggressive travel conditions and very kind of active policymaking, right, which is what you can get just more easily in an authoritarian state, if the authoritarian state chooses to go that way. And maybe this comes to Ed, to your point about Bolsonaro, who, you know, in kind of Political Science terms, he fulfills some of the criteria you might see in particularly right wing populism. But you can imagine already that his approach has been actually not particularly stringent when it came to kind of cracking down on COVID, mask wearing etc. So it's kind of the power you wield is only as important as the choices you make. So when you think about the upcoming Brazillian election, you mentioned already the role of Bolsonaro, and I think there's a generally somewhat pessimistic view of Bolsonaro from the COVID perspective. But when you look at it from a growth perspective, what is a "good growth outcome"? Good economic outcome from these these upcoming elections? Is it Bolsonaro getting reelected?
I think you're right, that Bolsonaro is a double-edged sword in many ways. He, I think he has really botched the response to COVID as as, as you rightly suggested, but he's popular with investors. He's popular with investors, because of two reasons. He is appointed as a fiscally responsible finance minister. So he's stedied the fiscal ship to some degree, for at least that that's that's his rhetoric, so that there has been various reforms on the fiscal front. And secondly, there have also been kind of micro structural reforms going on in the background, which should boost potential growth and reduce what was often called the Brazil cost, which is essentially just the the very, very large cost of doing business in Brazil, lots of red tape, etc. And it takes a long time to start business and, and all these sort of macroeconomic constraints. So he started to lift that as well as decent privatization. So he is popular with investors. I think, as we approach the election, there is a risk that Bolsonaro starts, the reform agenda starts to fade. And also that he turns to fiscal loosening to shore up his support base. You know, the cash handouts last year as part of the fiscal stimulus were very popular, and boosted his support. So I think there is a very real risk that he starts to become more fiscally irresponsible as the election approaches. It's also worth bearing in mind that fiscal policy always loosens ahead of general elections in Brazil and Latin America more generally. So it wouldn't be a surprise, if that was to happen. And that would not go down particularly well with financial markets. I think with the Brazilian election, there is a risk, you know, that it becomes very polarized with ex President Lula who is a populist on the left hand side of the political spectrum, where to win in the election. I think that outcome would probably spook investors. You know, as I say, it's too early to say whether he will run or whether he will run against Bolsonaro.
Great. No, I think that that was super, super useful. And I think I mean, we can talk about political risk and emerging markets in a moment without talking about Turkey. I think, in particular, this week, has underscored some of the concerns that investors have. I'm interested just to get your take on, you know, the Turkish kind of policy environment at the moment and what your view is on what's going on and what the implications are.
Yeah, maybe. I'll jump in briefly, Steph. And then Ed can chip in on this one, too. I think, Turkey is a really good example there. It doesn't necessarily take voters going to the polls, to get emerging market political, political shocks. And here we've got a definite, you know, a large swing away from what had been deemed a kind of move towards more policy, orthodoxy more market-friendly measures. I'm not sure if it's a record or not, I was trying to research this earlier. This is of course president Erdoğan's fourth Central Bank governor. Within two years, I could only find one which is Liberia, which had three central bank governors period of kind of two years before so you know, just really highlighting there in a slightly more serious note, kind of how much churn there has been within that key policy institution within Turkey. Turkey's been on our kind of highest risk rating for quite some time now anyway. Ed and I have been furiously writing about Turkey this week, to the extent that, you know, this shift back to unorthodox policies is you know, in many ways really complicating this policy balancing act. We've got a desire for lower interest rates and a signal by central bank Governor. But we've got high, very high inflation, looking at core inflation month on month frequency, has actually averaged about 25% annualized, over the last three months. With a very low FX reserves current account deficit. You know, put all that together. And you're really in a very unenviable position. The use of banking system assets, does give the authorities some room to maybe prop up the exchange rate, you could get more room for kind of muddling through, if you will. But I guess the kind of, you know, the very long run questions are with the authorities really at the tolerance for kind of potential slowdown that might truly kind of unwind balances, and put turkey in a more sustainable footing going forward?
That's really interesting. In particular, because it kind of touches on this point we've talked about a lot when we talk about political risk and markets, a kind of globally, which is the difference between sort of cyclical political risks and institutional political risks. And I think it sounds like Turkey is a good example of when your institutions are built in such a way that they can be easily interfered with politically, it can, you know, alongside a sort of political norms that are developed, I think it can lead to these quite dramatic outcomes. And in some ways, that's been the differentiator between developed and emerging market populism in recent years is, to an extent populist impulses in developed markets have been constrained by the institutions that are kind of long term developed in this developed markets in a way that it sounds like an emerging markets, you just don't have that same safety valve, I guess.
Yeah. And I think you see that in probably other countries, aside from Turkey. Last few years in Turkey, we've seen a centralization of power around the present Erdoğan, and you know, that again, gives him more scope. So kind of bend, the institutions to his will. And that, you know, as you say, that creates institutional risk. There's, other major EMs, like Hungry, can be another example of one where the kind of the political leaders are kind of damaging the institutions that could maybe be acting as a bit of a kind of a buffer in normal times.
Yeah, absolutely. So maybe that's, let's jump into the next section, which was we were hoping to talk about vaccine diplomacy. This is something Bob that you've been on to talk with us before about maybe a month or two ago, but I just wanted to speak quickly on the kind of latest because China and Russia seem to be at the center of a number of vaccine diplomacy disputes at the moment. So I thought we could start with China, which is, you know, as we've talked about before, China has this kind of long term strategy and vaccine diplomacy seems to be a part of it. How successful has the kind of Chinese vaccine diplomacy effort been thus far? It's very early, I realized, you know, if you were to say, when you look across the approach they're taking and the outcomes they're getting, what's your take on it?
Yeah. I mean, as you said, we were discussing this a bit recently, in the previous podcast. I think it has been reasonably successful overall. We know with developed markets really focusing on their Home Nations, China has been filling the gap, if you will, to expand its soft power, and its reach within different countries. It's, you know, it's a little bit opaque. It looks like Chinese vaccine donations are to around 50 countries worldwide. And they've got commercial agreements with what looks like around about about 30, or maybe a bit under 30 countries. And indeed, you know, that's quite a in many ways, quite generous scheme could potentially equate to almost a quarter with their national production. So you know, in that sense, vaccine diplomacy is very much in full swing in China.
Absolutely. And then Ed, I might bring you in on Russia. So, there's been a lot of talk on this podcast about the EU's vaccine rollout issues. How does Russia fit into this debate? And where is Sputnik being used, Sputnik 5, I think is the name of the Russian vaccine?
You're right there are no shortage of takers really in any EMS in terms of the Russian vaccine much like the China vaccines. Of course, much of the former Soviet bloc have procured the Russian vaccine. Also, interestingly, much of Latin Africa, the Middle East, in a place like India, Brazil, Argentina, Mexico, Egypt have all procured the Sputnik five vaccine. And as you mentioned in Europe, so Hungary and Slovakia have gone outside of the centralized EU procurement and secured Sputnik five doses. And you know, interesting, they're now more advanced in their rollout relative to the rest of Europe. So certainly the Sputnik five is gaining momentum, and there's no shortage of takers. I mean, there is a lack of transparency on the efficacy data. But I think it's worth noting that Russia has kind of a rich, rich history of virology and vaccine development is actually quite impressive, you know, in the 1950s, Russia and the broader Soviet Union actually played a major role in producing and testing the polio vaccine, for example. So, I mean, clearly, there is a lot of uncertainty about the efficacy. And I think it's worth flagging that there is a general risk that use of what might prove to be ineffective vaccines backfires, and kind of feeds into Stokes, anti vaxxer sentiment, I suppose that that will be a secular risk.
I think that's interesting that you raised the question of whether it's effective or not, because I think there is debate, at least in terms of the market environment, and I think the broader kind of societal environment, which is whether Western produced vaccines are necessarily more effective, or safer than the Chinese vaccines or the Russian vaccines, for example. I'm interested from both of you to understand, is there data to suggest that Western vaccines are more effective? Or is it more maybe reflective of what you've just said there at around? I guess, belief in the institutional transparency of these big countries affects people's willingness to believe in the US or our, you know, not just people's I mean, you know, I guess, medical doctors and the scientific community might have a little bit more skepticism because of that transparency, because I guess my understanding was that Sputnik five, results were released to the Lancet. Right, which is a very well respected scientific journal?
Yeah, I'll go first. And then Bob, maybe you can chip in? Yeah, that's a good point to test. The fact that the efficacy numbers that are on sputnik five that at face value are very good. I think that as you say, the bigger issue is the transparency of the whole process. And I think that is that is the main risk for people that could stoke the anti vaxxer sentiment, not necessarily the reduced efficacy.
And I think that's it, it's the kind of the lack of transparency makes it so difficult to judge. So, you know, I really struggle to judge what I think the efficacy of the Chinese vaccines is. And, you mentioned that the Lancet report said 90%, efficacy for Sputnik. I mean, that's great. If you take that at face value, this is flagging the danger of the lack of transparency. I was just reading a report by the levada Center, which just conducted a poll within Russia. And that reported that only 30% of Russians were actually willing to take the Sputnik vaccine. So you know, you know, there is a cost, I think, to not being transparent, and kind of building confidence in your vaccines by really being open, letting people show you how effective it can be.
Yeah, absolutely. And I think it's also, I mean, it's worth noting that, you know, the point that Ed made earlier about the relative success that Sputnik is having in some Eastern European countries, I think even I've seen headlines suggesting that Germany might be considering or might have provisionally agreed to look at using the Sputnik vaccine as well. I think there's a foreign policy element to all of this, which is, again, we've talked about for a vaccine diplomacy is real, and actually the whole reason for European procurement. One of the rationales underlying it was to ensure that all European member states were receiving a Western vaccine, ie not reliant on a Russian vaccine, and that's a very foreign policy incentive that's has very little to do necessarily with COVID. But obviously, it does play into these issues around transparency, and relative kind of power that you wield. If you are a major vaccine producer. That might link us finally to this the last question, I'm going to ask you for maybe one sentence, which is around the impact of the new US administration. So the Biden administration obviously has lots of implications. We talk a lot about us China relations on this podcast and in our writings. But I'm interested to know what the kind of economic and foreign policy impact of the new US administration is likely to be for big powers like China, Russia, for last time, you know, particularly but also them for smaller Ems that might get caught in the US-China crosshairs. So maybe Bob I might go to you first in terms of the China effect and that smaller EM effect.
It's a difficult one to solve in one sentence. I think the economic tools are, tariffs, and so on, are kind of the kind of little entry here to stay effectively. But I think what we kind of are seeing maybe is a bit more of a ramping up of like, known tariff actions, you know, more recently, we've kind of seen both US, but also EU sanctions against China. So I think there's some really difficult choices there. What the US's ultimate aims are, is it really willing to trade off economic access, versus human rights? or indeed, no, is the environment some sort of bridge to smooth over relationships? Maybe I shall just pass over to Ed for the kind of last one because I think that's kind of quite illustrative of kind of some of the smaller EMs in a way and kind of how, how the US administration's kind of change a policy particularly the transition, I think, from Trump to Biden is probably probably a good talking point.
Yeah, absolutely. I mean, and LatAm, as well as most, most other countries in the world should benefit from reduced political uncertainty from the White House, particularly with diplomacy and trade policy not being conducted by by tweets. Now that I think more generally are unlocked, that there are probably two key areas to watch for that where Biden might have an impact. The first is migration from from Central America. We see this link to the vaccine diplomacy points that we spoke about earlier. But you know, the US has agreed to send surplus AstraZeneca vaccines to Mexico, as well as Canada, and Mexico, it appears in returners has tightened border restrictions with Guatemala and Belize, for example. The second topic to mention is obviously Biden's climate change agenda, which could put pressure on some LatAm countries and some countries elsewhere in the world. Obviously, US Brazil relations, could stop sour over the deforestation of the Amazon clearly wasn't an issue for Trump who stopped quite a close bond with President Bolsonaro. And yet, I mean, Biden's focus on clean energy could put downward pressure on real oil prices over the medium term and potentially hasten peak oil, which would weaken long term prospects for oil producers in LatAm. So for example, Colombia, Ecuador, Mexico, Venezuela, which, which could lose market share to the lower cost producers in the Middle East.
That's quite a substantial set of changes that LatAm faces in particular, but maybe beyond in terms of the change to the Biden administration, we'll have to have you both on again, to have a longer conversation about that, because it feels like such a huge topic that we could spend an entire episode on. But I'm sure that my producers will start to give me the signal now that we need to wrap up for today. Thank you so so much, Bob, and Ed, for your insights and candor. I think we've been able to cover a huge amount of ground and we'll have to absolutely get you back on in the near future to dig into these issues in a little bit more. Huge thanks to our audience who keep providing so much support and interest in this podcast. If you have any comments on the discussion today, questions or ideas for future episodes, you can email us at macromatters@Aberdeenstandard.com in particular at the moment we are asking for young economists who might be studying at university to get in touch with any topics that they're really interested in, maybe what they're looking at to do their thesis on and if they'd like to hear us dig into those issues a little bit more, so please do get in touch. Otherwise, please join us again next week.
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