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What does the great rotation mean for countries’ economies? Is it simply a case that those most affected by the virus will also recovery the most? This is not simply a case of mean-reversion. Take Mexico for example: hurting from a 10% growth contraction ytd, and with poor existing COVID infrastructure, the vaccine could bring much-needed relief. But we fear the first round of vaccinations arrives only in Q3, later than in most other major countries. By contrast France should have relatively early vaccine access, and the current GDP shortfall is a mere 4%.The anti-vaccine movement is strongest in France. But with polling suggesting only 54% of respondents in France would actually get the vaccine when it is available (the most anti vaxx of major countries), any recovery here could be very stop-start as the government finds it needs to continue with lockdown policies.
Enter the matrix. We have split the dynamics into: Starting points. A pre-requisite for rotation is underperformance. India, Mexico, the UK and Spain (in that order) are the most-hit countries in terms of GDP growth; by contrast north-east Asian countries’ economies are some of the strongest this year. Ditto for FX, where BRL and RUB are the standout fallers so far this year.
Vaccine implementation risk. The UK is likely to be one of the earliest countries to complete its first round of vaccinations (by which we mean vulnerable people and front-line workers), so the case for UK outperformance in the recovery is compelling. Taiwan is likely to be much later – and there is no GDP gap to fill. Mexico is also likely to be late with vaccinations: one should not expect a sharp rebound in Mexican GDP. And while Indians and Brazilians are very supportive of receiving a vaccine, there is very little to go around ("doses ordered per capita"), which could act as a drag on the recovery in these countries.
Existing COVID infrastructure. In Taiwan there is no need for an early vaccine as COVID mitigation policies are successful. That is generally the case elsewhere in north east Asia, but certainly not in other EMs or the US. With several vaccine candidates likely soon available this is not necessarily a problem: an early vaccination program can sweep aside current infrastructure problems. But with Mexico, India and Brazil facing implementation risks, these countries may not be best-placed to enjoy any recovery.
Economic exposure. China has gained global trade market share this year, in part as import demand concentrated on WFH-products which China was best-placed to sell. If we assume the vaccine re-opens global supply chains, other trading economies should expect to catch up. Brazil and Mexico could both benefit here – the return external demand depends on external vaccine programs, and could mean their economies are not the worst laggards in the recovery. Also importantly for Spain and Mexico is their reliance on tourism: this doesn’t need a domestic vaccine, as vaccinated US or European tourists could fuel a recovery even before a local vaccination program bears fruit.