Stall speed is the slowest a plane can fly while maintaining level flight. As the pace of vaccinations accelerated across the U.S. and Europe, Asia’s performance has been relatively slow, creating both economic and health risks. The rising case counts in Japan and fresh waves of COVID-19 cases in Singapore and Taiwan illustrate the challenges in re-opening economies without sufficient protection from higher vaccination numbers. Meanwhile, the developments in India reinforce the human cost of COVID-19 as well as its economic cost.
The slower pace of vaccinations may restrict Asian economies from fully participating in the global economic re-opening, as risk of further outbreaks limit social mobility, weighing on activity, particularly in the services sector.
Nearly all countries are pursuing a strategy of herd immunity as they look to re-open domestic economies and re-integrate with global markets. Herd immunity is achieved through a combination of the natural immunity created from contracting the virus as well as inoculation against it.
The higher case counts across Europe and the U.S., somewhat perversely, imply a faster path to herd immunity as a greater share of the population becomes resistant to the virus. Meanwhile, the number of fatalities as well as the prolonged economic restrictions created a greater emphasis from the government and the public for a successful vaccination roll-out.
Contrast this with the experience of Asia Pacific regions, such as Australia, Korea and Taiwan, where more successful containment strategies were rewarded with greater domestic freedoms and seemingly more “normal” daily life. This places greater importance on vaccinations to reach herd immunity.
The less severe COVID-19 experience in some Asian economies and the lower risk of contracting the virus in daily life, as well as concerns surround possible side effects, may have increased vaccine hesitancy, or at least muted any urgency around the need to be vaccinated. These are hurdles that policy makers must overcome to accelerate the pace of vaccinations.
The most recent vaccination rates across Asia show a split path with a sharp pick up in vaccination rates in Hong Kong, Singapore and China (see Exhibit 1) and a much slower pace elsewhere. Continuing the current pace should see at least 60% of the population of these economies being vaccinated by year-end. At the other end of the spectrum, Japan, South Korea and many southeast Asian economies may not reach the 60% threshold until 2022 or possibly later based on the current pace of vaccinations and COVID-19 cases as a share of the population.
In some instances, a larger and more predictable supply of vaccines will help lift inoculation rates. However, for those countries with an adequate supply, the solution may be to increase public incentives to become vaccinated. This could be through benefits if vaccinations have adverse negative effects or incentives that allow those fully vaccinated greater freedoms such as international travel or social interaction.
Based on the path of vaccinations in Europe, the UK and the U.S., it’s not implausible that vaccination rates will see substantial increases (for a single dose at least). For example, Japan has given one dose of the vaccine to 2.5% of its population, and at the current pace would cover 20% of its population by year-end. Applying the almost linear rise in the vaccination rate witnessed in Europe to Japan suggests administering vaccines to 60% of the population by the fourth quarter of the year.
Vaccination rates are accelerating across some Asian economies, but many are still lagging
The lingering effects of COVID-19 and relatively low pace of vaccinations across parts of Asia have the potential to create an unwanted economic drag. Spikes in case numbers have been met with further mobility restrictions, leading to selling pressures in risk assets.
Year to date, Asian equities have lagged developed markets given the increasing expectations for stronger growth in the developed world and ongoing fiscal support. The MSCI Asia Pacific ex-Japan index has gained 2.4% this year compared to 11.5% for the U.S. S&P 500 or 11.9% for the MSCI Europe (total returns in USD). However, this creates the potential for Asian markets to catch up once vaccination rates increase and case numbers recede. The expectation is that vaccination rates will rise with the correct mix of incentives being created as well as simply following the slow path of pick up that was experienced in other countries.
However, vaccination rates will still matter for perceived risk of further economic restrictions, and those economies lagging on vaccinations may also experience lagging equity market performance. Furthermore, increasing levels of demand from strengthening growth in the U.S. and Europe should lead to increased trade and improving earnings outlooks for those markets with the greatest beta to global growth and points toward northeast Asian markets outperformance.