Investment Adventures in Emerging Markets


In the Face of an Uneven Economic Recovery

First-quarter economic data suggest the longer-term global outlook and recovery will be anything but linear, argue Franklin Templeton Investment Solutions Head of Research Gene Podkaminer, and World Bank Group Lead Economist for Malaysia Richard Record. In the midst of vaccination programmes and continued fiscal stimulus, they got together to discuss how they are navigating a mid-pandemic economy.

Below are a few takeaways from their discussion we thought were valuable, followed by some more detailed views.

Gene Podkaminer, Head of Research, Franklin Templeton Investment Solutions

  • A fiscally fueled expansion is pretty well-established, but it’s uneven across regions. Growth is likely to remain relatively robust, but the pace of growth is uncertain. We don’t think COVID-19 will spell the end for globalised production, despite a pick-up in some onshoring trends. Keeping the growth trajectory in mind, we maintain a much more optimistic stance towards riskier assets.
  • The trajectory of the global recovery and valuation concerns mean we’re moderately bearish on bonds. As vaccines roll out, there’s great hope of accelerating economic activity globally with fixed income.
  • There’s ongoing tension between fiscal stimulus and vaccination programmes. The experience in Israel shows a path forward as high vaccination rates have coincided with reduced hospitalisation. Some countries have implemented generous and accommodative policies to tackle the economic impact of COVID-19, but not every country has been willing, or has the resources to do so, alongside the challenges of creating and implementing a vaccination programme.

There are a lot of moving parts and big themes that drive the markets, and when building portfolios we need to think about managing risks and opportunities across multiple asset classes. Today, we believe we need more of a balanced approach than in the past.

We look at three main macro factors: economic growth, inflation and interest rates. These three factors cut through every asset class and every investment decision that an investor makes. It doesn’t matter whether an investor holds local equities, commodities, fixed income, or real estate. The state of the economy is translated through economic growth. From that perspective we see a fiscally fueled expansion which is fairly well-established, but is uneven across regions. This is not an expansion that is going to hit all countries and all regions the same way.

Global Stimulus Fuels Growth

The outlook remains a little less clearer than usual with respect to growth. Growth is going to be relatively robust, especially when compared year over year, but it’s the pace we need to figure out. We believe that inflation will probably move higher, driven by demand. We also think it’s premature to call an end to globalised production, despite some of the onshoring trends that we’ve been seeing. When we look at the base effects and some of the recovery in commodity prices, we see that as boosting headline inflation. As such, it’s pretty clear global central banks will likely remain accommodative, but are also keenly aware of the downside risks and also the risks of policy errors. The transition from measures during the crisis to those supporting the recovery has kept liquidity flowing.

I want to highlight that the amount of stimulus that has been injected into the global economy is truly staggering. It is beyond anything that we’ve seen over the last several decades, and we need to appreciate what that stimulus is going to look like, and also what that stimulus is capable of doing.

The Longer-Term Growth Story

We’ll be focusing on the medium-term growth outlook, one where inflation is unlikely to be very problematic. We maintain a much more optimistic stance towards riskier assets when we look at the growth story, which is strong, the inflation story, which at this point is benign, and interest rates, which are very largely being supported by central banks.

Equities require a sustained economic recovery to offset the anticipated normalisation of valuations, but as vaccines roll out, there’s great hope of accelerating economic activity globally. In regard to fixed income, we’re moderately bearish, and that reflects valuation concerns amid a global recovery.

Ongoing Tension Between Fiscal Stimulus and Vaccination Programmes

Countries with strong vaccine programmes have lower hospitalisation rates, and that significantly reduces the strain on the health care system, and also enables a much speedier return to pre-COVID-19 levels of activity. Israel is a good example of that. We’re all hopeful that countries can ramp up vaccine delivery infrastructure and make sure that everybody who wants to be vaccinated can be. Ultimately, getting people vaccinated will really help drive economic activity.

When we look at the policies that have been put in place by the United States, the United Kingdom, and other countries, we expect monetary policies will remain very loose for some time. Fiscal policies are going to be accommodative as well, but not every country has been willing or able to go as deep fiscally as the United States or the United Kingdom. This is where that tension between fiscal stimulus and vaccination really meets.


Richard Record, Lead Economist for Malaysia, World Bank Group

  • The global pandemic created a triple shock to Asia’s economy. We’re expecting a three-speed recovery to follow. Some countries are already recovering; others are seeing a rebound but not yet a recovery; and some are seeing neither. That said, we’re seeing some strength in advanced economies that is triggering improved economic indicators and a revival of trade and foreign direct investment.
  • Amid a rebound, Malaysia could soon transition to a high-income economy. The country is on track to pass the threshold that defines high-income within the next few years, but a number of reforms will be needed to boost the quality and sustainability of economic growth.
  • The pandemic has exerted a heavy price on Malaysia but it has also brought opportunities, such as an accelerated pace of digitalisation. Clearly, COVID-19 has had a deep impact on lives and livelihoods. However, in the future we may look back on this period and consider how the pandemic pushed businesses to accelerate the pace of digitalisation. While there are concerns that business closures and learning losses may cause long-term economic scarring, rapid digital adoption could lay the ground for higher productivity in the future.

Triple Shock Leads to Three-Speed Recovery

We spent much of last year talking about a triple shock to East Asia’s economy, the first being the direct health impact of the pandemic affecting people’s lives and livelihoods. Next, restrictions associated with lockdowns affected domestic economic activity. And then we had the impact of the global shock, which affected East Asia as a region, particularly in the area of trade and tourism.

Just as we saw a triple shock to the economy, we’re seeing what we’d call a three-speed recovery this year. China and Vietnam both have already surpassed their respective pre-COVID-19 baseline in terms of economic activity. Other countries are rebounding, but not yet recovering, such as Malaysia as well as the other large middle-income economies of the region. And finally, there are some economies that are seeing neither rebound nor recovery. In Malaysia, we’re looking at an output surpassing its pre-COVID-19 level perhaps towards the end of this year, if not early next year.

Around 90% of the world’s economy experienced a contraction in 2020. But now, we’re seeing a rebound in global growth, with strength in large economies—particularly the United States and China—that is triggering a revival of trade, foreign direct investment and improved financial flow indicators.

Navigating the Next Stage of Malaysia’s Development

Malaysia’s ambition is to become a high-income and developed economy. This goal goes back to its “Vision 2020.” It didn’t happen in 2020, but we think Malaysia will pass the gross national income (GNI) per capita threshold that defines high-income country status and so escape the middle-income trap in the next few years. However, this impending transition presents many new questions about the direction of Malaysia’s economy. And, comparing Malaysia against high-income comparators emphasises a number of areas where reforms will be needed.

For example, it’s clear that there is a significant gap between the supply and demand for skills across the economy. In Malaysia, we consistently see large gaps between what companies in the private sector tell us they are looking for in the labour market, and what they are able to find at every skill level. Closing this gap was a key challenge for Malaysia, even before the pandemic. However, the crisis and educational closures that resulted from it have also negatively affected Malaysia’s human capital. We’re seeing similar disruptions across the region.

One of the biggest gaps between Malaysia and other economies that have moved from middle-income to high-income is the ability of the government to raise revenue. Malaysia is currently collecting about 15% of gross domestic product (GDP) in taxes, which is low compared with comparator economies.

Bouncing Back from the Pandemic

COVID-19 remains a major source of uncertainty, but we’re starting to see Malaysia move away from blanket approaches towards more targeted interventions to contain new outbreaks as they occur in clusters. We’re seeing growing concerns around government spending in the wake of the crisis, principally the availability of fiscal space to support further stimulus. Even before the pandemic, Malaysia was already running up against its debt limit policies. The limit was changed last year; the maximum ceiling on borrowing was raised from 55% of GDP to 60%. There are concerns about contingent liabilities and the extent to which the government can prudently spend to support a recovery. We’re also seeing continued weakness in private investment, given the many sources of uncertainty.

Despite the challenges associated with COVID-19, the pandemic also presents some opportunities. This includes the significantly accelerated pace of e-commerce and digitalisation that’s reshaping many economies, including Malaysia. In the future, I think we’ll look back at COVID-19 and talk about it as a sort of laboratory experiment in terms of what happens when you force businesses and consumers to accelerate the pace of digitalisation due to external factors.

And so, the big question is how can Malaysia move out of the crisis? Public policies, including the various economic stimulus measures, have helped blunt the impact of the crisis. But we believe the only way to forge a lasting recovery is to boost private sector investment, invest in the quality of human capital and to stimulate faster growth in productivity.

What Are the Risks?

All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in fast-growing industries like the technology sector (which has historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasising scientific or technological advancement. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.

Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Smaller company stocks have historically had more price volatility than large-company stocks, particularly over the short term. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the publication date and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

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