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Market Outlook

Emerging Markets (Core) Outlook

Outlook
14 October 2024

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Latest Emerging Markets (Core) economic and market outlook. 

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The most significant events in markets over recent weeks have been policy easing in the US and China. The Fed decided to cut by 50bps, which we believe was the correct call, with 3-month rolling underlying inflation already below the central bank’s 2% target and rates clearly restrictive at these levels. This decision reinforces our view that there will be a soft landing in the world’s largest economy, and we take additional comfort from the fact that the Fed has substantial scope to cut much further. As we have argued previously, these rate cuts should be effective because consumer balance sheets are in reasonably good health across the developed world.

While the Fed’s decision was well-telegraphed, policy easing in China caught investors by surprise and catalysed a major relief rally. Key announcements include: cutting the Reserve Requirement Ratio to inject RMB 1 trillion of liquidity into the system; lowering outstanding mortgage rates to ease the mortgage burden for c.150m people; reducing downpayments for second homes; setting up a new swap facility to allow asset managers and insurers to tap at least RMB 500 billion of PBOC liquidity to purchase equities; and providing a further RMB 300 billion of funds to allow banks to lend to corporates for share buybacks. At the time of writing, there is speculation that these measures will be followed up with a series of fiscal announcements, including cash handouts for the poor, and issuing RMB 2 trillion via special bonds to stimulate consumption and help local governments tackle debt problems. These policy changes will surely prolong the glide path to a new ‘normal’ lower growth environment. However, it remains to be seen whether the measures can help to solve China’s structural issues of overinvestment, a weak consumer, and ageing demography.

Chinese equities have bounced sharply off the lows, but positioning remains fairly light as starting levels were extremely depressed. The policy measures seem to be intended to stimulate buying from domestic investors, and there are early indications that they are chasing the rally. In fact, order volume in China A-Shares was so large that the Shanghai Stock Exchange experienced a 90-minute malfunction. This stands in stark contrast to the reopening rally or May 2024 rally, when onshore investors did not participate meaningfully. Accounting for 80% of the China market, retail investors will have a key role to play in determining the sustainability of the rally. It is thus important to recognise that there is a wall of excess savings still on the sidelines, while margin financing levels remain below their 4-year average at only RMB 1.4 trillion. However, this must be balanced against the fact that stocks have already moved a long way. Indeed, it is now difficult to argue that China overall is cheap and oversold. MSCI China is very close to its 5- and 10-year median P/E valuations. With all this in mind, we have tactically increased exposure to China, but remain underweight. We have been buying large, liquid consumption plays including PDD, JD, Alibaba, NetEase and Ctrip, as well as stock exchange HKEX. Korea and Taiwan were used as the main funding source as these markets had been the key beneficiaries of inflows from investors amid China weakness in recent years.

More generally, we were already bullish on the outlook for EM equities into 2025 as we believe the era of dollar weakness has begun, with the Fed likely to cut rates quite aggressively amid well-controlled inflation. Since the turn of the century, there has been 87% positive correlation between a weak dollar and EM equity outperformance versus Developed Markets. The main caveat to this positive outlook had been concerns over weakness in China. Clearly a massive stimulus drive in the largest emerging market helps to alleviate these concerns and should set up EM equities for a strong period of performance.

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Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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