Fund managers are reembracing emerging markets – with China’s revival a key factor.
- Donald Trump has deferred China’s reciprocal tariffs for another three months
- The Bank of America Fund Manager survey showed a net 37% of fund managers are overweight emerging market equities
- Optimism on China and the continued weakness in the dollar are the key drivers
Donald Trump has deferred China’s reciprocal tariffs for another three months while a deal is concluded between the two nations. If stock market performance is any guide, investors in China weren’t all that bothered anyway. Chinese equities have been on a steady rise higher since Liberation Day, undeterred by US economic aggression.
This recovery in China may be part of the reason investors are re-embracing emerging markets. The most recent Bank of America Fund Manager survey showed a net 37% of fund managers are overweight emerging market equities, the highest level in over two years. The group attributed this bullishness to rising optimism on the Chinese economy and the recent weakness in the Dollar.
The recent economic data from China has been encouraging, and suggests that the country can thrive whether or not Trump ‘chickens out’ of his latest tariff round. GDP growth for the second quarter was 5.2%, ahead of expectations, while the most recent Caixin data showed China's services activity expanding at its fastest pace in 14 months in July, rising to 52.6 from 50.6 in June.
The weak dollar should allow emerging market central banks to reduce interest rates, which have been forced to remain artificially high in some cases. This should provide a fillip to economic growth for many emerging market countries. The BofA survey found a majority of fund managers expect dollar weakness to continue. It was the largest underweight position.
That said, it is worth saying that emerging markets are not homogenous and there is always likely to be one area of weakness even as other areas are rebounding. This time it’s India, which has kept emerging market indices afloat for the last few years, but has struggled over the past 12 months. This is a combination of weaker consumer data, slowing government spending and some sentiment problems stemming from high tariffs imposed on Indian exports. Valuations were also very high. Nevertheless, none of these difficulties derail the long-term prospects for Indian equities.
Overall, emerging market equities have shrugged off these pockets of weakness and delivered a strong start to the year. In dollar terms, the MSCI Emerging Markets index is up 17.5% for the year to date, compared to just 10.8% for the MSCI World. They still look substantially cheaper than their developed market peers – with a forward p/e of 13x compared to 20x for the MSCI World. The magnitude of emerging market underperformance over the last decade has been significant. We may only be in the foothills of a recovery.
