The global economy is seeing an uneven recovery from COVID, with emerging markets (EM) lagging their developed-market peers. But as EM countries seek to get their economies onto a sustainable recovery path, there are opportunities to be unearthed by investors.
Governments in both developed and emerging economies are putting plans in place to get their economies back on track. As nations increasingly focus on investing in a sustainable recovery that goes beyond a quick bounce-back, environmental, social and governance (ESG) considerations are gaining importance, and a range of opportunities linked to infrastructure and sustainable assets are opening up to investors.
“The global recovery will offer good opportunities especially across emerging markets,” says Razia Khan, Standard Chartered’s Head of Research, Africa and Middle East. “Governments across the world are focused on building back more sustainably. This could lift prospects for everyone looking to tie investment to socially linked and sustainable assets, particularly where capital flows can be most effective.”
While global economic prospects are generally looking up, heightened near-term uncertainty, the prospect of tighter monetary policy, rising inflation in developed economies and higher levels of public debt are downside risks to recovery. How might investors best navigate this investment landscape?
Building back better
Assets linked to ESG will play an increasing role as investors focus on channelling their capital to make a difference. Market-driven mechanisms where the public and private sectors work together offer one way to supercharge this, in tandem with local government reforms.
There are challenges – the global response to COVID-19 may have inadvertently complicated the investment environment for some lower-income countries, and more needs to be done to ensure that capital flows reach those that have been hardest-hit by the pandemic.
However, the trend is worth focusing on. Increasing interest in green and social investing may help to attract new investors to emerging markets. Capital geared towards supporting sustainable recoveries and money deployed by ESG funds can provide opportunities for infrastructure development in emerging and frontier markets. For example, sustainability-linked bonds and green bonds could provide channels for international financial institutions to provide support and even out the economic recovery. And sustainability bonds could enable some countries to raise the capital they need while also addressing the UN’s Sustainable Development Goals.
An emerging asset class
Emerging and frontier markets are ripe with opportunities, despite their slower recovery from the COVID-19 pandemic relative to developed nations.
Advances in their legal structures and economic growth in recent decades have made many of these countries less high-risk, allowing them to narrow the gap with developed markets. While their slower pace of vaccine rollout is likely to lead to a more protracted economic recovery, emerging and frontier markets will still benefit from rising external demand. The recovery in developed markets has been a boon to global trade and has helped to create a more favourable price environment, particularly for commodity exporters. This has improved the investment outlook.
Still, the uneven economic recovery appears to be here to stay. Even within EM, there are vast differences. Some, like China and the UAE, were able to contain the virus promptly, and others, like Poland, were able to deploy fiscal support. In contrast, economies that entered the pandemic with macroeconomic imbalances or large debt burdens are facing a steeper path to recovery
No taper tantrum
Against this backdrop, rising prices in much of the developed world have sparked concerns that stimulus plans may have to be pared back more quickly, and that interest rates will have to rise.
After the global financial crisis, the Fed’s stimulus withdrawal plans (the so-called ‘taper tantrum’ of 2013) led to market turmoil. This time, with inflation expectations looking more anchored, the effects of the Fed taper are likely to be more muted.
Even so, interest rate normalisation and the tapering of stimulus are likely to remain a key focus over the next year. By the second half of this year, the positive effects of vaccination campaigns in major developed economies should start to filter through, helping to spur momentum in emerging markets. A more concerted global effort to boost vaccine supply in developing countries may also lift sentiment. The return of more sustained growth in emerging markets may help – at least partially – to offset any tapering concerns.
All global players have a role in shoring up the virus response.
While the crisis may offer opportunities for emerging and frontier markets to accelerate reforms and build back stronger, they cannot do it alone. International financing can offer a range of funding options which could be key to ensuring prosperity and closing the gap.
“Economic growth will return more forcefully to emerging markets in the months ahead,” says Ms. Khan. “Investors would do well to position themselves for this eventual firming up of the global growth outlook.”
The global economic recovery is expected to be strong but uneven as many developing countries struggle with the lasting effects of the pandemic. Along with addressing vaccine distribution and debt service relief, taking steps to spur green, resilient, and inclusive growth while safeguarding macroeconomic stability is also imperative.
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.