The Economist - USA (2020-11-13)

The EconomistNovember 14th 2020 Finance & economics 63

2 aggregate, the financial security of house-
holds has proved remarkably stable.
A survey by the Federal Reserve found
that 77% of adults were doing “at least OK”
financially in July 2020, up from 75% in Oc-
tober 2019, before the pandemic struck. Be-
tween March and September households
saved 19% of their gross income, up from
6% during the same period the year before,
thereby accumulating $1.3trn (6% of gdp)
in extra savings.
The stockpile gives consumers a buffer
for the coming months, and should help
support economic growth. In part for that

reason, another blowout stimulus package

may not be needed now that a vaccine is

near. Lawmakers from the Democratic

Party have pressed for spending of $3trn or

more. Injecting money into the economy

could well hasten the recovery. But another

$1trn a year in stimulus may be enough to

restore normality, assuming that by the

start of next year the gap between Ameri-

ca’s current and potential gdp may be

around 4% of output, and that increases in

government spending will translate some-

what less than one-to-one into extra gdp,

as the evidence currently suggests.

A lot could still go wrong. Stringent

lockdowns, European style, could still de-

rail the recovery. Stimulus may not be

passed at all. Either would worsen the eco-

nomic scars that have so far been min-

imised, for instance by making it harder for

the 3.6m Americans who have been unem-

ployed for more than six months to find

work. America’s many layers of govern-

ment could delay the distribution of vac-

cines, just as they have botched the alloca-

tion of covid-19 tests. But households and

businesses, at least, are in better shape

than you might have feared. 7

Buttonwood Coming out of the ultracold

A

n indian economicofficial once

remarked to Buttonwood that his

country’s economy does best when the

rest of the world does well—but not too

well. India’s exports benefit from global

growth. But when the world economy

gains too much momentum, interest

rates and oil prices can rise uncomfort-

ably high, hobbling a country that is a net

importer of both capital and crude.

His observation came to mind as

India’s stockmarket roared to a record

high on November 10th, after news that a

covid-19 vaccine developed by Pfizer and

BioNTech was proving more effective

than expected. It will be months before it

becomes widely available even in the

countries equipped to handle it. But the

reproduction number of investors’ exu-

berance can be very high.

Another spur to India’s stockmarket—

and to emerging-market equities more

broadly—was America’s election. The

result, when it emerged at last, removed

one lingering source of uncertainty. That

has made room in investors’ stomachs

for other types of risk. The renewed

appetite for edginess helped lift msci’s

benchmark emerging-market equity

index by over 6% from November 3rd to

9th. It is now up by more than half from

its lowest point in March.

Though Wall Street has been setting

records, the emerging-market index is

still far from the all-time high it reached

in 2007 or even its peak in 2018. Indeed

over the past decade emerging-market

shares have made little forward progress,

albeit by the most nail-biting route pos-

sible. Big gains in 2012, 2016-17 and 2019

were offset by spectacular falls in the

intervening years. Overall the index is

just 3% higher than ten years ago.

That underperformance, however,

leaves emerging-market stocks looking

much better value than their rich-world

counterparts. According to Oxford Eco-

nomics, a consultancy, the ratio of price to

earnings, adjusted for the cycle, for emerg-

ing markets lies in the bottom half of its

historical distribution. America’s ratio, by

contrast, is above the 98th percentile.

The valuation gap looks even more

glaring when compared with immediate

growth prospects. The gdpof emerging

markets, weighted according to their

stockmarket capitalisation, will shrink by

less than 2% this year and grow by about

5% in 2021, according to forecasts by the

Economist Intelligence Unit, a sister com-

pany of The Economist. America is doing

better than most of the rich world, but

even so its economy will still shrink by

4.6% in 2020 and grow by less than 4% in

2021. Some members of the msci’s index,
      such as China and Taiwan, have handled
      the pandemic well, allowing for an early
      return to growth. Others, such as India,
      have handled it badly. But precisely be-
      cause their first attempts at lockdowns
      were so ineffective, they are unlikely to
      interrupt growth by trying another one.

These discrepancies have not gone

unnoticed. Some strategists think that

unloved emerging-market shares might

benefit from the kind of “rotation” that

in the past few days has propelled in-

vestors out of expensive “growth” stocks

(such as tech) and into “value” stocks, the

revenues of which are more closely tied

to the state of the economy.

They also think that the most belea-

guered emerging markets might benefit

from a rotation within the rotation. John

Lomax of hsbc, for example, recom-

mends increasing holdings of countries

like Brazil and South Africa (which are

still heavily down on the year) at the

expense of Asian ones, like Taiwan.

There may be a catch, though. Emerg-

ing-market assets may be priced like

value stocks. But in another important

respect—their sensitivity to bond

yields—they more closely resemble

growth stocks. When interest rates and

bond yields rise, investors become less

willing to bear risk or wait for future

profits. That hurts growth stocks and

emerging markets alike.

Consider the following scenario. The

Pfizer vaccine is approved. But because it

must be stored at Antarctic tempera-

tures, it never reaches the emerging

markets, such as India, that lack the cold

chains needed to distribute it safely. The

vaccine might therefore spur an uneven

recovery, led by rich countries.

That rebound could put upward

pressure on bond yields: the Pfizer news

alone raised yields on ten-year American

Treasuries to almost 1% on November

9th. And the tightening of global fi-

nancial conditions could hurt emerging

economies by more than the improve-

ment in rich-world growth helps them.

They could do badly, if the rest of the

world does too well.

Will the vaccine be a jab in the arm for ailing emerging-market shares?