Chinese stocks faced scrutiny due to the impending removal of 66 Chinese companies from MSCI Indexes, amplifying concerns over China’s market challenges. However, the actual impact on the indexes may be minimal, with the majority of the removed companies holding insignificant weight. The net change reflects sentiment but has minimal effect on investment decisions.
Justin Leverenz, senior portfolio manager for Invesco, manages the Invesco Developing Markets and explores Mexican equity markets. His podcast and interviews discuss macroeconomic orthodoxy and the resilience of Mexico’s institutions. Leverenz believes in globally advantaged businesses with good corporate governance and sees emerging markets as attractive relative to the developed world.
China’s impact on emerging markets (EM) is significant, with potential stimulus expected to support EM assets. Anticipation of lower US interest rates may drive investment in EM assets, while positive developments in China could further strengthen EM markets. Investors may consider the Vanguard Emerging Markets Government Bond ETF as confidence returns to EM.
Investors are debating whether China or India provides better opportunities, but the WisdomTree India Earnings Fund (EPI) has outperformed the MSCI India and China indices. EPI’s focus on profitable companies and favorable factors such as demographics and economic growth could make it a top single-country bet in 2024. India’s potential for better return on equity and stable rupee add to EPI’s appeal.
In this white paper, the focus is on how emerging markets’ sound fiscal and monetary policies have led to outperformance over developed markets. The absence of “fiscal dominance” in emerging markets has contributed to their strong bond performance, driven by low debt and deficits. Asia emerges as the primary beneficiary within emerging markets.__JETPACK_AI_ERROR__
The VanEck Emerging Markets Bond Fund increased exposure to lagging Asian local markets such as Indonesia and Malaysia, and local-currency positions in Chile and Brazil. The Fund ended December with carry of 7.0%, yield to worst of 8.9%, and nearly 50% in local currency. It cautions against duration due to Fed-pause-induced rally and holds positions in Egypt’s dollar-denominated bonds post-conflict.
China’s post-COVID economic revival faces challenges of low consumer confidence, plummeting property sales, and high youth unemployment. The government’s 1 trillion renminbi stimulus aims to stabilize the economy through infrastructure investment and post-disaster recovery. While the semiconductor industry grapples with U.S. restrictions, key investment areas in 2024 include consumer segments, high-end manufacturing, and the Chinese bond market.
India, currently Asia’s third-largest economy behind China and Japan, is poised to lead the region in economic growth. This is expected to benefit exchange traded funds like the WisdomTree India Earnings Fund (EPI), which invests in locally traded Indian equities. EPI is projected to perform well due to the anticipated increase in India’s GDP and the fund’s focus on profitable Indian companies, avoiding those with large debt obligations and high interest rates. The growing tech sector within India’s economy also supports EPI’s strong outlook.
Investors exposed to Chinese equities encountered a difficult 2023, with the MSCI China Index falling 7.6%. The downturn was attributed to factors like geopolitical tensions, advances in other emerging economies, and struggles in China’s property sector. However, as 2023 closes, some predict an improved environment in 2024, particularly for exchange-traded funds (ETFs) such as the WisdomTree China ex-State-Owned Enterprises Fund (CXSE). Improved U.S.-China relations, growing Chinese consumer confidence and increased global investment in China are potential catalysts for this shift.
Given the speculation of the Federal Reserve lowering interest rates and a retreating dollar, the interest in bonds is increasing. Particularly, emerging market bonds are being considered as potential investments in 2024. Specifically, VanEck J.P. Morgan EM Local Currency Bond ETF and VanEck Emerging Markets High Yield Bond ETF show promising yields with lower volatility, making them worth considering despite common apprehensions.
Despite a challenging macroeconomic environment, India remains an attractive destination for emerging markets investors. Many investors are diverting funds from other emerging markets to dedicated India funds. Even with recent geopolitical volatility, India sustains healthy capital allocation. India’s GDP is projected to grow from $3.5 trillion in 2022 to $7.3 trillion by 2030.
The VanEck Emerging Markets Fund marginally outperformed the MSCI Emerging Markets Investable Market Index in Q3 2023, largely driven by successful stock selection in Turkey, Georgia, and Kazakhstan. Fund performance was negatively impacted by its Brazil allocation. Standout contributors included Bank of Georgia and Kazakh payments platform Kaspi.kz. The fund focuses on identifying long-term growth companies at a fair price through robust due diligence.
Despite hurdles in 2023 involving geopolitical risk and high savings rate, China’s economy remains a key diversification option from U.S. equities for investors. The IMF has upgraded China’s growth projections, warranting a closer look at investment options like the KraneShares CSI China Internet ETF (KWEB). This upgrade, along with potential fiscal reforms and increased consumer spending, present a promising investment case for China.
While emerging market ETFs lag behind S&P 500, they register combined net inflows of $6.5 billion. Advisors have concerns over “China-specific risks” and “volatility”. As China forms a large part of emerging markets, several ETFs omit Chinese stocks to avoid these risks. Other options include ETFs owning less volatile Chinese stocks or ETFs providing exposure to the Chinese internet sector with downside protection.
