May 2024 Emerging Market Insights: China’s market rebounds

Three things we are thinking about today

1. China: Chinese equities have rebounded, reversing the negative returns recorded in the first quarter. Catalysts for the improvement in performance included positive developments in the real estate sector. A Chinese property developer announced agreement with its bond holders to restructure its overseas debt. In addition, Chinese authorities have been easing home purchase restrictions (these restrict buyers to purchases in their home province and/or limit the purchase of a second property) and lowering mortgage interest rate floor limits. No individual announcement is sufficient to turn the tide of negative sentiment; however, the emerging mosaic of positive news has contributed to a 7% gain¹ in the MSCI China index in April, outpacing the gains in other global markets.
2. US interest-rate expectations: Investor expectations for US interest rate cuts have reset. In January 2024, the market consensus was for six rate cuts and a cumulative 1.5% reduction in the fed funds rate. By the end of April, this changed to expectations of 1.4 rate cuts and a cumulative 0.35% reduction in the fed funds rate.²Faster-than-expected inflation and increasing probability of a “no-landing” economic scenario in 2024 have contributed to the change. For emerging markets, this could imply a higher-for-longer US dollar outlook, which has negative implications for fund flows and companies with large foreign currency debts.
3. Commodity prices: The Commodities Research Bureau Index of commodity prices rose 7.4% year-to-date through the end of April.³ This reverses most of the 8% loss recorded in 2023. Rising energy and industrial metal prices, including copper, have contributed to the gains. Agricultural commodity prices are also rising following a wet spring planting season in Europe and drought conditions in Asia caused by El Niño. Higher commodity prices are also undermining the narrative of falling global inflation, which investors should closely monitor. Higher- than-expected inflation has implications for interest rates in developed countries and purchasing power in emerging countries.

Outlook

One of our portfolio managers recently visited India, complementing the work of our on-the-ground analysts to garner a deep understanding of the investment landscape. The week-long trip included a consumer tour and visits to companies and regulatory bodies. These meetings were synchronized with what we have identified as the growth drivers of India—capital expenditure, premiumization and productivity.

On capital expenditure

Our portfolio manager observed that construction was prevalent in the cities she visited, namely Mumbai and Delhi. Railways, airports and roads were being built or repaired. India’s infrastructure has improved vastly since the COVID-19 pandemic. She felt that these projects could lower costs and potentially boost company revenues. The management of a hotel chain agreed with her view. He alluded that improved infrastructure has been an enabler of domestic tourism. Beyond modes of travel, other enhancements such as the completion of convention centers have played a part in their expansion plans. As of writing, the hotel chain has a goal to set up more than 100 hotels domestically within three years.

On premiumization

Our portfolio manager also visited several quick-service restaurants (QSRs). Her findings supported the corporate results of these QSRs, where post-COVID recovery was slow. This contrasted with her visit to a high-end jewelry store. She conducted her visit on an off-peak hour during a weekday in a quiet season—in India, some holidays will drive jewelry sales. She noted that business was thriving. This corresponded with a quote from an unrelated company, where management predicted that 100 million of India’s citizens would reach the upper middle-class in India in the next few years. This would thus help drive the premiumization opportunity in India.

On productivity

She also visited different manufacturing plants, where leaders had a common observation: a rise in production capacity queries due to increasing interest from multinational corporations to diversify their supply chains. There was also public interest in working for these plants. A company she spoke to said that there were at least 100 to 200 people queuing at the factory to apply for a job. In her view, the large domestic market that India—in terms of the workforce and ability for companies to sell to the large population locally—is a segment of significant potential.

In all, our portfolio manager emerged from the trip with a more positive view on India than ever. The structural drivers of India’s growth remain in place. With a bottom-up view of the investment landscape, we believe that there are numerous companies with long-term earnings power in the investment universe. Our on-the-ground teams are equipped with access to company management, which is crucial in our assessment.

Market review: April 2024

Overall in April, emerging market equities outperformed developed market counterparts, which fell. Stronger-than-expected inflationary pressures and an economic slowdown in the United States rejigged expectations of a higher-for-longer interest rate environment. For the month, the MSCI EM Index returned 0.47% while the MSCI World Index fell by 3.67%.

Equity markets in the emerging Asia region rose. Chinese authorities’ stance on improving the stock market there—in a bid to revive investor confidence—boosted equities. They outlined actions including strengthening the supervision of company listings, de-listings and dividend payouts. Meanwhile, India commenced its six-week long general elections. As noted, our portfolio managers visited India recently, and conversations around elections reinforced corporations’ expectations of policy continuity.

Technology stocks in Asia were pressured in the wake of a broad-based technology selloff in the United States. This impacted equity markets in South Korea and Taiwan, which are heavily weighted to the information technology sector. In South Korea, the main opposition party retained a majority in the country’s National Assembly. A large Taiwan-listed semiconductor foundry’s downward revision of its 2024 growth forecast for the semiconductor market also contributed to weakness in Taiwan’s equity market. Our technology-focused research analyst is satisfied with the company’s forecast and is of the view that the company’s valuations remain relatively reasonable, with what appear to be solid fundamentals.

Equities in the emerging Europe, Middle East and Africa region advanced overall. Geopolitical tensions between Iran and Israel cast an initial shadow on Middle-Eastern stock markets. However, market consensus that the conflict is unlikely to lead to regional escalation helped to curb losses. In Turkey, the opposition party won the local elections. The ruling party—which the current president is affiliated with—cited rising inflation as a key reason for a loss of voter support. Turkish stocks rose upon the president’s post-election speech, where he acknowledged the need to work toward macroeconomic stabilization and the importance of reducing inflation. Turkey’s central bank followed up with a surprise bumper rate hike, bolstering the country’s banking stocks.

Equities in the Latin America region were collectively the worst performers. Inflationary environments diverged. While Brazil’s annual inflation rate fell to a nine-month low in March, Mexico’s consumer prices rose unexpectedly in the first half of April. Chile’s goal to boost its lithium industry has yielded results, with a global mining group and a South Korea-headquartered battery company among 30 companies that have submitted proposals to develop lithium extraction technology.

Index Definitions

1. 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. Past performance is not an indicator of future results.
2. 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. 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 of future results.
3. 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. Past performance is not an indicator of future results.
4. 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. Past performance is not an indicator of future results.
5. 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. Past performance is not an indicator of future results.
6. 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. Past performance is not an indicator of future results.
7. 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. Past performance is not an indicator of future results.
8. The Commodities Research Bureau Index is comprised of a basket of 19 commodities and represents the global commodities market. 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 of future results.

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. 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: Bloomberg. April 30, 2024.

2. Ibid.

3. Ibid.