Emerging Markets Insights: China steps up

Originally Posted, 4 October 2024 – Emerging Markets Insights: China steps up

China steps up, Middle East tensions rise and early voting in the US presidential election is in full swing. Our Emerging Markets Equity team reviews the impact of these developments on future equity market trends.

Three things we are thinking about today   
China steps up: Chinese policymakers have announced a slew of stimulus measures targeted at reversing the downturn in economic growth and deflationary forces in the economy. Similar to the end of COVID-19 lockdowns in 2022, the policy change is sudden and dramatic. Reasons for the change in policy direction are being hotly debated. One potential factor was the start of the US Federal Reserve’s (Fed’s) interest-rate-cutting cycle, which has put downward pressure on the US dollar (USD), which fell 4% in the third quarter. The weaker USD has taken some pressure off the USD-renminbi spot rate, which Chinese policymakers did not want to see weaken excessively. 
Middle East tensions rise: The Middle East conflict has escalated, with Israel conducting multi-front offensives. Iran’s missile barrage on Israel marks a significant development and is challenging the stability of the region. Despite these developments, a full-scale war between Israel and Iran remains a low probability event the short term. The escalating tensions have impacted the regions asset markets and global oil markets. This region accounts for 40% of the world’s seaborne oil trade. We remain watchful of the situation and managing risk associated to our investment exposure to the region.
US election countdown: US voters go to the polls on November 5, with some early voting already underway. The impact of early voting on the election is potentially significant, with a Massachusetts Institute of Technology (MIT) study¹ highlighting that 60% of Democrats and 32% of Republicans voted by mail in 2020. However, a Republican or Democrat president may not be as significant for asset markets as the makeup of the House and Senate. A clean sweep for either party is likely to be unsettling for investors, whereas a divided Congress has historically been positive as it has provided a check-and-balance on the tax and spending priorities of the president.
Outlook
The investment landscape in emerging markets (EMs) is peppered with inflection points. We are seeing several turns in market sentiment of in selected EM countries. However, we continue to balance the market’s reactions with our own in-depth analysis.
China’s equity markets are cheering the rollout of more stimulus measures. The measures announced can broadly be classified into three buckets—policy rate cuts (which we largely expected), property market measures (which continues from previous policies to aid a recovery) and equity market policies (which were new and were a pleasant surprise). While some scepticism remains on the efficacy of the policies, our China equity portfolio manager thinks that more policy support will come, sensing renewed urgency on meeting economic targets. While economic data to support the rally comes with a lag, we remain watchful for additional policy measures to reverse the downturn in growth and deflationary pressures.
Several of our portfolio managers attended a conference in Latin America (LatAm). The interest and upgrade in Argentinian equities, especially banking stocks, was noted by our portfolio managers. However, our Argentina-based research analyst was more cautious. In his view, Argentine banks are fairly valued. While expectations of macroeconomic improvement are rife, the country is not one that he encourages excessive investments in. Another LatAm-based research analyst echoed this view. He believes that while there are bargains in Argentina, they may not be worth the risk.
Another one of our LatAm-based research analysts also had an unconventional view. Market-watchers have noted that the judicial reform in Mexico may derail the country’s relationship with the United States. However, a conversation he had with a law professor threw up a contrasting view—it would take a much bigger issue to derail the relationship. There are also ways to resolve this judicial concern, such as arbitration. The analyst’s Mexican coverage is of companies which, in his view, have low valuations and are exposed to the consumption story.
 In all, we abide by our bottom-up investment approach and leverage our on-the-ground presence and extensive network for a balanced view. This network goes beyond just companies, channel checks and independent research providers. We continue to keep a watchful eye on changes in the investment environment to identify opportunities.
Market review: Third quarter 2024
EM equities rose over the quarter. The Fed’s long-anticipated interest-rate cut overshadowed earlier fears of a recession in the United States. For the quarter, the MSCI EM Index returned 8.88% while the MSCI World Index rose by 6.46%.
The emerging Asia region rose. In China, geopolitical tensions continued to feature heavily. The latest development was the Biosecure Act, which impacted biotechnology companies. However, some positive news helped the Chinese equity market. This included an e-commerce firm’s inclusion on mainland stock exchanges, and more support measures. Indian equities continued to benefit from positive economic data. The reduction in US interest rates, which may lead to foreign inflows into Indian equities, was also supportive. The trading debut of a housing finance company marked India’s biggest new listing of 2024.
Waning optimism about artificial intelligence (AI) impinged on the technology-heavy markets of South Korea and Taiwan. While South Korean semiconductor shipments expanded at the slowest pace in five months in August, Taiwan’s AI- and high-performance computing-related shipments rose in the same month. In Southeast Asia, Indonesia’s central bank implemented a surprise rate cut. Thai equities recovered as the political overhang in Thailand has appeared to conclude with the election of a new prime minister.
The emerging Europe, Middle East and Africa region edged higher. Middle Eastern markets benefited from the rate-easing cycle in the United States—monetary policy in the Gulf Cooperation Council often aligns with the US Fed’s decisions. The rate cut in the United States may prompt central banks in the Middle East to adopt similar measures, which may enhance business conditions. South Africa’s central bank followed global cues and reduced its interest rate in its latest monetary policy meeting as it battles sluggish economic growth amid moderating inflation.
Equities in the emerging LatAm region advanced. Mexican equities slid after a controversial judicial reform was signed into law. Brazil’s central bank started raising interest rates to control inflationary environment amid stronger-than-expected economic activity. This move marks a contrast with most other global central banks, which have begun to ease rates.

Endnote
Source: “How we voted in 2020.” MIT Election Lab. March 2021.
Index Definitions
The MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
The MSCI All Country World Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global developed and emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
The MSCI EM Latin America Index captures large- and mid-cap representation across five emerging markets (EM) countries in Latin America. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
The MSCI Emerging Markets EMEA Index captures large- and mid-cap representation across 11 emerging markets (EM) countries in Europe, the Middle East and Africa (EMEA). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
The MSCI EM Asia ex Japan Index captures large- and mid-cap representation across two of three developed markets (DM) countries (excluding Japan) and eight emerging markets (EM) countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
The MSCI Emerging Markets ex-China Index captures large- and mid-cap representation across 23 of the 24 Emerging Markets (EM) countries* excluding China. With 672 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
The MSCI Mexico Index is designed to measure the performance of the large and mid cap segments of the Mexican market.
 
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.