Three things we are thinking about today
- China policy recalibration: Following a sharp decline in the technology sector in January, policymakers in China are reviewing draft legislation titled, “Measures for the Administration of Online Games.” The legislation was designed to further restrict engagement and monetization of online games in China. Policymakers’ willingness to make adjustments based on feedback from investors is positive in our view and signals a more pragmatic approach.
- Interest-rate expectations reset: Investor expectations for the timing of US interest-rate cuts have been pushed back, adjusted following the US Federal Reserve’s (Fed’s) January policy meeting. Investors in December 2023 may have become too optimistic in their assessment on the timing of rate cuts. This reassessment led to a near 3% rally in the US dollar in January,1 which among other factors, has weighed on the performance of emerging market equities. Nevertheless, this is a delay as opposed to a reassessment, and a “no-landing” scenario for the US economy remains the market consensus. It is likely the US dollar will resume its downward trend, which would be supportive of emerging markets—emerging markets tend to perform better in a weak-dollar scenario.
- Election watch: Indonesia, the world’s third largest democracy, will go to the polls on February 14 to elect a new president. The front runner is Prabowo Subianto from the Great Indonesia Movement (Gerindra) party.2 Prabowo has the support of the incumbent president Joko “Jokowi” Widodo and has pledged to focus on security and defense. He was a defense minister in Jokowi’s government and has indicated he will safeguard Jokowo’s development legacy. This is a likely factor behind Jokowi supporting his candidacy, as opposed to the candidate from his PDI-P party Ganjar Pranowo. For investors, a continuation of the policy related to the refining of domestically mined metals is likely to continue, which looks positive for domestic growth.
Macroeconomic headlines in recent months have largely influenced equity-market performance. Despite the overarching theme of interest-rate cuts, our on-the-ground presence allows us to be aware of drivers of performance in local markets. An example would be the slow recovery in China, marked by intense competition in selected sectors, and a shift in spending patterns.
A core tenet of our investment philosophy is a bottom-up approach. We identify companies that have competitive advantages that would aid their long-term growth, profitability and earnings. At times, this may go against market reactions. While many investors sold off their holdings in China’s gaming stocks on the release of new draft gaming rules at the end of 2023, some of our portfolio managers chose to increase exposure to a Chinese internet company instead. They felt that the stock’s decline was greater than the estimated impact on long-term earnings and took the opportunity to add to existing positions.
In a sea of overlooked and under-researched companies, we believe there is no substitute for local market knowledge. Improving corporate governance is also a trend we have noticed in emerging markets (EMs). This includes dividend payouts and buybacks, which we think solidifies the long-term attractiveness of EM equities. We combine our bottom-up focus with these developments to identify opportunities.
Market review: January 2024
EM equities fell during the month of January and lagged their developed market (DM) counterparts, which advanced. Investor concerns about China’s economy and fading optimism that interest-rate cuts were imminent in the United States dampened market sentiment. For the month, the MSCI Emerging Markets Index returned -4.63% while the MSCI World Index advanced by 1.22%.3
Equities in emerging Asia fell. Most countries within the MSCI benchmark registered losses, and markets in China and South Korea led declines. While China’s 2023 economic growth exceeded the country’s official growth target, year-over-year fourth-quarter growth and other data such as retail sales and employment fell short of consensus expectations. However, reports of a market support plan pared some losses toward the end of the period.
In South Korea, the government reduced its growth forecast and raised its inflation estimates for 2024. The government also released a slew of measures to stimulate consumption. On a positive note, South Korea’s exports expanded for a third month in December—shipments of semiconductor products rose, as did their prices. Corporate results were mixed—while artificial intelligence bolstered semiconductor firms, automotive firms faced an uncertain growth outlook. In Taiwan, the Democratic Progressive Party (DPP) candidate won the island’s presidential election. While Indian equities managed to advance, they suffered from a bout of profit-taking after recent gains. India’s financial firms also faced selling pressure on mixed quarterly results and worries of declining profits.
Markets in the emerging Europe, Middle East and Africa region also registered losses. Tensions in the Middle East escalated, leading to a spike in oil prices. While higher oil prices would typically be conducive to the equity markets in the Middle East, the possibility of later-than-expected rate cuts in the United States pared some gains. However, corporate earnings lent a supportive hand to banking stocks in the Middle East.
Equities in Latin America declined. Inflation was a key theme—while Brazil and Peru saw an improvement, Mexico’s headline inflation continued its upward trend. The share price of Brazil’s national oil and gas company rose on the back of increased output for 2023 and intention to acquire the Jaspe oil block. This will increase its production capacity and in turn, drive growth.
WHAT ARE THE RISKS?
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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.
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1. Source: FactSet, February 2, 2024.
2. Source: “Who will be the next president of Indonesia?” The Economist. February 2, 2024.
3. Source: MSCI, FactSet February 2, 2024. 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. 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.
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.