Global | Short-sighted markets underplay long-Covid scarring
The market is not pricing in cross-economy differences in long-Covid scarring. Changes in EM sovereign spreads since the start of the pandemic are hardly correlated with long Covid vulnerabilities, while in FX markets EMs have depreciated too much relative to AEs.
Oxford Economics longer-term forecasts reflect our efforts to systematically take into account long Covid scars. Other macro forecasters and financial markets may not have managed to do so yet to the same extent.
We estimate scarring based on our long-Covid vulnerability scorecard, which covers 37 variables and 162 economies. Our own forecasts have a reasonable correlation with these metrics, though not perfect, of course.
According to our metrics, we see downside risks to long-term GDP in several European economies, including Belgium, Spain, Portugal, France and Germany. Some of these may be partially mitigated by EU-wide funding support, which is not included in our scorecard. And there are upside risks to GDP in some larger EMs including Brazil, India, Philippines, South Africa, Indonesia and Mexico.
We acknowledge that Covid scars are not the only factors to have affected markets and economies in the last year; still in our opinion they are an important issue that should be reflected in macro forecasts and market prices.
For EM sovereigns, we would advise investors who place importance on LongCovid scarring to overweight Brazil, Egypt, Pakistan and underweight Peru, Dom. Rep. Mongolia.
Based on Long Covid vulnerabilities, the currencies of Indonesia, Mexico, Brazil and South Africa have weakened too much.