Can China-Fueled EM Rally Continue? — Evening Brief – 10.08.24
The recent resurgence in emerging market stocks, almost exclusively propelled by the outsized rally in the Chinese equity market over the past two weeks, is one of the most remarkable recoveries in recent history. Excluding China, however, the emerging market equity complex is exhibiting a slightly weaker performance year-to-date.
For comparison. US equities, using the iShares Total U.S. Stock Market Index Fund (BASMX) are effectively tied with the iShares MSCI Emerging Markets ETF (EEM) so far in 2024, up 20.4% and 20.3%, respectively. Meanwhile, the iShares MSCI Emerging Markets ex-China ETF (EMXC) has lagged the broader rally, up 9.5% this year. As of late September, the two ETFs had nearly equal year-to-date performance.
In a year that was previously characterized by the dominance of US equities over emerging markets, the comparable results are particularly noteworthy. But this began to change when China announced aggressive stimulus policies to support its slowing economy last month, including slashing both its reserve requirement ratio (RRR) by 50 basis points and the 7-day repo rate by 0.2 percentage points.
The pledges of economic support propelled a nine-day winning streak for China’s CSI 300 blue-chip index, which has gained more than 25%. Last week, the index rose more than 10%, while the Shanghai Composite Index increased by more than 8%.
The news has sparked a rally in emerging market stocks, albeit the spillover effect outside of China began to fade in late September. The question is whether China’s stunning comeback will continue.
Lynn Song, chief economist of Greater China at ING, predicts that for the near term the optimism-fueled rally could roll on “albeit at a less furious pace.” Much depends on previously announced policies and “how soon and aggressively” the stimulus plans are implemented, Song said. “If any of these things fall short, the optimism could falter.”
The elephant in the room seems to be a lack of consumer confidence. It is hard to feel optimistic about the future when job security is tenuous, salaries remain stagnant and as investors see the value of their real estate and equity holdings depreciate by the day,” noted economists at Nikko Asset Management.