By Tom Arnold LONDON (Reuters) – A surge in emerging markets linked to the success of COVID-19 vaccines may not fully reflect the challenges of delivering scarce supplies to some of the world’s poorest countries, suggesting a 2021 full of potholes for investors in the asset class. . The launch of the vaccine is already shaping up to be the investment theme of the year. Israel’s early immunization campaign helped the shekel reach 24-year highs and helped local stocks, while Chile’s peso gained 1.3% over the past month, helped by its push to end vaccination in the second trimester. At the other end of the spectrum, the Brazilian real has been punished recently, in part due to concerns about vaccine supplies from its countries and the spread of a new variant of the coronavirus in the former. Shekel shines, real and rand battered https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdgmravo/Capture2.PNG But elsewhere, investors have been less demanding after stampeding emerging market assets back to late last year in betting on a strong economy. resurgence of the pandemic. However, the longer-term global recovery depends in part on vaccine distribution and this is why emerging markets are expected to lag behind developed markets, which have sourced more vaccines than needed. Timely delivery of vaccines is proving to be a “challenge,” World Bank chief economist Carmen Reinhart told the Reuters Next conference. “It all depends on the vaccine and the virus. For the short-term economy it’s more the virus, for the markets it’s probably more the vaccine,” UBS chief economist Arend Kapteyn said on a recent UBS podcast, referring to the global economy. Most investors anticipate that vaccines should reach emerging markets widely during the second half of the year, a recent Citi survey showed. That suggests little room has been discounted for potential setbacks, such as new waves of viruses or delays in vaccination. Meanwhile, some countries that are moving forward with vaccination are reaping only limited rewards. “Whenever investors are bullish on global growth, they buy EM FX (emerging market currencies) in general, rather than digging too deep into local stories,” said Dirk Willer, Citi’s head of emerging markets strategy. More than 60% of the variation in exchange rates is explained by global factors, Willer said. The outlook for the US dollar, one of those factors, now looks less certain after a rebound from lows of more than two and a half years, as expectations of a spending spree under the incoming Joe Biden administration have boosted yields. of US Treasury bonds. A weaker dollar normally supports emerging markets and their currencies. Citi noted the risk that markets will begin to worry about slow or inefficient vaccination programs in countries that already face fiscal challenges, such as Brazil. But for most countries, there seems to be less scrutiny so far. The Russian ruble and the South Korean won have underperformed over the past month, despite the relatively quick inoculation schedule of the former and the latter ensuring a high dose level as a percentage of the population. COVID-19 Vaccine Doses Administered Per 100,000 People https://graphics.reuters.com/HEALTH-CORONAVIRUS/VACCINE/yxmvjqzbbpr/chart.png BEYOND VACCINES Similarly, credit margins have narrowed since pandemic across the board. Sovereign bonds of Israel and Abu Dhabi, two of the world leaders in doses administered to date, are trading at levels similar to those of Mexico and Saudi Arabia, two of the laggards. Still, Mexico’s credit may be supported by obtaining one of the highest doses as a percentage of the population in emerging markets. Limited Signs of Vaccine Shake in Emerging Market Dollar Bonds https://fingfx.thomsonreuters.com/gfx/mkt/dgkplkmnnvb/Capture.PNG There shouldn’t be too much differentiation in the performance of sovereign credit based on the vaccine performance, said Nick Eisinger, senior fixed income emerging markets principal at Vanguard. “Of course, emerging markets will benefit from the developed countries coming back online and from this stronger activity in exports and services,” he said. Some investors are looking beyond vaccines, seen as a single variable, and instead focusing on more traditional metrics, such as public finances and external financing needs. “We don’t have any direct input from the vaccine or even the pandemic, infection rates or anything in our credit models,” said Yong Zhu, senior portfolio manager at DuPont (NYSE 🙂 Capital. “What really matters to us is how the pandemic and policies impact macro indicators and if there is any long-term structural change in the country.” Rather, the vaccine rollout is central to HSBC’s emerging markets capital strategy, said John Lomax, director of the bank’s global emerging markets capital strategy. It has increased its overweight position in countries such as Indonesia and Thailand. “The markets that handled the virus the worst have much more to gain from vaccine implementation and economic normalization, even if it takes time,” Lomax said.