Positive signs from China offer optimism for emerging markets
A vaccine booster programme and further policy stimulus should eventually pave the way for Beijing to loosen Covid-19 restrictions
Over the first four months of 2022, we have witnessed synchronised global monetary policy tightening, the start of the RussiaUkraine conflict and a new Omicron wave in China, all of which have posed challenges to emerging market equities.
As a result, the MSCI Emerging Markets Index fell by more than 12 per cent during this period. Much of the weakness was due to expectations of slower global growth and higher interest rates. A stronger US dollar amid an increasingly hawkish Federal Reserve also creates headwinds.
As the country with the largest weight in the index, China’s lacklustre performance has been a major drag on emerging market equities. China’s March activity data showed a broad-based slowdown in growth momentum. The disappointing April manufacturing trends point to a further slowdown due to tightened pandemic restrictions as Covid-19 cases remained relatively high.
Travel restrictions are causing logistics bottlenecks. Road freight flows, which account for more than 70 per cent of overall freight traffic in China, fell by more than 25 per cent year on year in April.
With China expected to maintain its zeroCovid policy in the near term, there is a risk of further lockdowns even after the current wave subsides, given Omicron’s high transmissibility.
China still lags behind in the vaccination of those aged 60 and above. As of April 28, 60 per cent of its elderly had received a booster shot, compared to 80 per cent to 90 per cent in developed market economies such as Britain.
Furthermore, China’s property sector continued to weaken in March. High-frequency indicators, especially home sales volume, suggest that property-sector activities remained depressed in April. Thus, the risk of a more persistent property market downturn is rising.
Other emerging Asian economies, including Taiwan, South Korea and India, which together account for 40 per cent of the MSCI Emerging Markets Index, also face challenges. Korea and Taiwan are export-oriented and therefore more vulnerable to slowing global growth expectations, changes in consumer demand from goods to services and supply chain disruptions. India, as a large net importer of energy, continues to struggle with high energy prices.
However, many of these challenges are already reflected in the markets. Thus, global growth may remain around historical averages, with fears of an imminent recession fading, which could boost export-heavy economies.
Energy prices are likely to remain high, but they will not surge as dramatically as during the past quarter. Cheaper valuations should also be supportive of emerging market equities, which are currently underinvested globally.
China’s policy environment is turning more favourable for emerging market equities, too. Given the economic uncertainty as a result of the Omicron wave, plus weakness in the property sector, Chinese policymakers should boost policy easing to support growth.
This is consistent with the pro-growth signals coming from last week’s Politburo meeting, which emphasised the importance of macro policy support to stabilise growth and achieve this year’s target of 5.5 per cent, easing market concerns that Covid-19 containment had taken precedence over economic growth.
Infrastructure investment was mentioned as a key growth lever, which should enjoy stronger fiscal support this year.
While the Politburo reiterated the principle of “housing is for living in, not for speculation”, it encouraged local governments to adjust their property policies based on the situation on the ground. Moreover, there are positive signals on the tech regulation front with the Politburo pledging support for healthy development of the platform economy.
Further policy stimulus should be expected from China, combined with evidence of a successful vaccine booster programme, which should pave the way to ease Covid-19 restrictions.
Equally, sustained demand for goods and the prevention of a further deterioration in supply chains could help support other key emerging markets in Asia. Hence, the outlook for emerging markets is set to become more favourable.
Global growth may remain around historical averages, with fears of an imminent recession fading