The drumbeats on China stimulus remain loud.
Perhaps even louder are the overweight calls for the EM citing “how cheap the region is”…
… and how underpriced China in particular, is.
Now we’ve talked a lot about how we didn’t think there’d be a big stimulus announcement, given all the other ones hadn’t “worked” (where “worked” here means “led the economy out of a deflationary slump and into one where positive price stability prevailed whilst output remained at trend”), and we also wrote a relatively recent note saying “the ~17% percentage point increase in debt/GDP over the past year might well have been the stimulus the market was looking for, just done without fanfare/a-big-annoucement“.
Stealth stimulus, perhaps. There has certainly been plenty of state-based intervention into markets directly, such as asking participants to limit sales, and to promote buys, commonly referred to as support from “the national team”.
Others have pointed to the idea that a weaker US dollar (perhaps one that comes as inflation returning to target means that monetary policy can relax from currently tight conditions) would lead to better returns for the EM region.
Which is certainly something that is bourne out in our econometric models (e.g. if you put the sorts of variables that make up the Fin Conditions index into a regression model, you get a reasonable predicted valuation uplift for the EM, predicated on a falling dollar, robust commodity prices, low and stable VIX).
Earnings for the region are expected to see a much better FY25 and 26, coming off a few years of relative weakness.
You can see the bifurcation within the EM indices below, India has done very well, China, not so much.
Coming back to calls of support for the EM; if China stimulus comes, it would probably lift the region. If stimulus doesn’t come, valuation support remains, and the diversification benefit from a small (i.e. non-zero or near zero!) exposure also remain.
UBS noted today that the MSCI China EM is now on a PE of ~8x. David Ingles noted the Hang Seng Index’s P/E is now below the Nasdaq’s P/B. They are remarkable stats.
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.
Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.