Three things we are thinking about today:
- Implications of regional conflicts on commodity prices: The impact of slower economic growth balances the impact of an escalation in the Middle East conflict on commodity prices. West Texas Intermediate crude oil prices rose in the third-quarter period,1 but have weakened in October. Liquified natural gas prices for South Korea and Japan rose in October, reflecting concerns over the potential disruptions in gas flows from the Middle East. However, with European natural gas inventories at 87% of capacity,2 the short-term impact of any supply disruption should be manageable.
- US limitations on China’s technology development: The US government recently announced an extension of its Foreign Direct Product Rule.3 The rule prevents any company from selling advanced computer chips to China. It applies to chips that use US technology, including most semiconductors. This extends the ban on the supply of semiconductor machines to include advanced chips, including those used in artificial intelligence models. We are monitoring the impact on Chinese technology companies, which have continued to manufacture increasingly advanced chips.
- China Singles Day: November 11 is known as Singles Day in Asia and is the world’s largest shopping event. It was started by China’s leading e-commerce company in 2009, and 2023 sales could exceed CNY1 trillion/US$137 billion.4 This year’s event is an opportunity for companies to adapt to the evolving demands of consumers. The emphasis is on value for money and better consumer experiences.
Outlook
Fears of higher interest rates for longer continue to weigh on markets. Higher interest rates may lead to lower consumption, and this is reflected in our portfolio positioning.
We find that mass-market consumption is still weak in several emerging market economies. A conversation our team recently had with the chief executive officer of a company based in India echoes this sentiment. He highlighted that people are not spending on clothing but that luxury vehicle sales remain robust. There are still signs of optimism for the economy in general. The upcoming elections in India may boost spending as the prime minister is likely to introduce policies as a means of gaining support.
Despite weaker-than-expected mass-market consumption trends, our investment approach has helped uncover other opportunities. We combine a long-term focus with a deep understanding of firms and sectors.
Our investment approach is long-term, stock-driven and valuation-aware. We find that this is especially important during periods of uncertainty such as the present day. We believe that our on-the-ground-presence is a key anchor of our approach.
Market Review: October 2023
Emerging market equities fell during the month and overall fared poorer than their developed market counterparts. The Israel-Hamas war has had a limited impact on stock markets, but higher US Treasury yields weighed on sentiment. For the month, the MSCI Emerging Markets Index declined 3.88% while the MSCI World Index fell 2.88%.5
Equity markets throughout emerging Asia declined. The US tightened controls on technology exports to China. This added onto existing issues that the country is facing, such as its property woes. However, there were some bright spots in the country. Chinese macroeconomic data continued to be better than expected. China’s stock market stabilized as its sovereign wealth fund purchased onshore exchange-traded funds and stocks of some banks. This helped to inject some confidence into the stock market.
India continued showing progress in its macroeconomic fundamentals. Retail price inflation eased again while industrial output grew at its fastest pace in more than a year. However, a mixed set of corporate earnings acted as a drag on the performance of Indian stocks.
In South Korea, industrial production rose to a two-year high. This was led by chip production, which signals a potential recovery in the semiconductor industry.
Markets in the emerging Europe, Middle East and Africa region also fell. Stocks in the Middle East were under pressure due to the Israel-Hamas war and concerns it may spread through the region. On a positive note, Polish equities gained as Poland’s opposition parties secured the majority of seats in its parliamentary election. This led to hopes of progress in the country’s relations with the European Union.
Equities in Latin America also saw losses. Brazil’s state-run oil firm Petrobras’ created a capital reserve fund, which hurt its stock price amid concerns that the fund might be used for capital investments instead of paying dividends. The removal of tax advantages for investments in closed-end funds and an uptick in inflation also affected Brazil’s stock market. In Mexico, stocks fell after a surprise announcement to increase tariffs by private airport operators. This gave rise to concerns of unexpected changes in other sectors.
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.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
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.
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.
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1. Source: Bloomberg.
2. Ibid.
3. Source: US Commerce department.
4. Source: Franklin Templeton.
5. 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. 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. Past performance is not an indicator or a guarantee of future results.