Emerging-market bulls betting that China’s reopening would drive a year of asset outperformances are seeing their dreams turn into dust.
(Bloomberg) — Emerging-market bulls betting that China’s reopening would drive a year of asset outperformances are seeing their dreams turn into dust.
The benchmark gauge for developing-nation stocks has not only totted up losses of more than 7% since a peak in January but is also underperforming its rich-nation counterpart by the most in three years. Chinese shares have contributed 70% of those losses, helping to erase $750 billion in market value. And the selloff is spreading to nations with the closest trade ties to China, such as South Korea and South Africa.
The losses have come despite the second-biggest economy expanding at a faster-than-forecast clip, led by surging exports and consumer demand. That underscores a plethora of idiosyncratic risks, not the least of which are China’s increasingly assertive stance on Taiwan, its relationship with Russia and the regulation of the private sector.
Investors remain underexposed to China as they seek more consistent policy signals that can sustain the economic recovery.
“Even though data is still supportive of China recovery, we of course are still a bit more skeptical and look through to see if that recovery is that real,” Wilfred Wee, a money manager at Ninety One Singapore Pte Ltd., said on Bloomberg Television. “It’s not just about a sweetener or a reserve-requirement-ratio cut, it’s about coaxing and engaging companies to excite the private sector.”
The MSCI Emerging Markets Index is heading for a 1.5% decline in April, trimming its 2023 advance to 2%. The MSCI World Index of developed-market equities is sitting on gains of four times as much. That has sent the ratio between emerging markets and rich nations down 5.6% this year, the biggest retreat since at least 2020.
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China’s economic fortunes weigh on almost two-thirds of the benchmark index’s performance as in addition to its own 30% direct weighting, it impacts the outlook of eight of the 10 other nations with the biggest presence on the gauge. It’s this influence that drove a 25% rally in the MSCI measure between October and January when China rolled back its crippling Zero Covid policy and set the stage for an economic reopening.
Since then, China’s economic data have indeed shown improvement. First-quarter gross domestic product rose by 4.5% from a year before, beating estimates of 4%, while retail sales in March witnessed the fastest acceleration since June 2021. But peering beneath the hood, investors question whether this strong growth figures will continue into the second half.
Data over the weekend suggested the recovery remains lopsided, with the production side of the economy lagging the rebound in consumption. Holiday spending figures on the first day of the five-day Labor Day break underscored the consumer recovery.
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High Hurdle
For one, the government is opening up new battle lines in its geopolitical quest. Escalating tensions with the US on issues from Taiwan to TikTok and semiconductor chips threaten to make China a no-go for western capitalists.
President Joe Biden is in the midst of corralling support from other nations in its efforts to curb investment into China’s high-tech industries, and plans to take action around the time of the Group of Seven summit in May.
Meanwhile, the private sector is getting confusing messages from the administration. The end of a ban on Australian coal imports and easing up on tech giants helped to brighten sentiment, but other signals — such as the disappearance of the high-profile banker from China Renaissance Holdings Ltd. and pressure from the nation’s finance ministry to shun the four largest global accounting firms — are unnerving business leaders.
“The hurdle is very high,” says Vey-Sern Ling, managing director at Union Bancaire Privee SA. “China has numerous perceived risks which puts it on a low priority for non-benchmarked investors. So unless the investment case is very clear or risk-reward is extremely attractive, it may be difficult to convince investors to put more cash to work in China.”
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Asset allocators are voting with their feet. Overseas funds sold a net $660 million worth of onshore China stocks in April, the first net foreign monthly outflow this year. The MSCI China Index has tumbled 5.3% in April, erasing this year’s advance. The gauge is poised to end April with a 19% valuation discount relative to the rest of emerging markets, a far cry from the 15% premium it traded at a year ago.
Currencies are similarly feeling the spillovers from China’s uncertain growth outlook. Asian currencies have underperformed against the dollar so far this year, as the region’s export-driven economies are dependent on China’s outlook, while Latin America’s currencies gained against the greenback mainly due to the higher carry on offer.
History shows “it takes two quarters to convince investors that the recovery is real,” Larry Hu, the head of China economics at Macquarie Group Ltd., wrote this month. “Despite the stronger-than-expected first quarter GDP number, the debate on recovery will continue in the second quarter.”
WHAT TO WATCH
- South Korea, Indonesia, Thailand, Philippines, Taiwan release inflation figures, as investors watch for signs price pressures are easing enough to support peak-rate narrative
- Turkey, Colombia CPI figures due
- China will release April Caixin manufacturing PMI figures on Thursday, as investors seek confirmation outlook for manufacturing expansion holds up
- Policy makers in Malaysia, the Czech Republic and Brazil will announce rate decisions, with all of them having held rates in the previous policy meetings
- First-quarter gross domestic product data due from the Czech Republic and Indonesia on Tuesday and Friday, respectively
–With assistance from Zhu Lin and Wenjin Lv.
(Updates weekend data in ninth paragraph.)
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