Emerging markets

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.

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