Equity Strategy - Should one turn more positive on China? How attractive is broader EM?

Speaker - Mislav Matejka, CFA, Head of Global Equity Strategy

China is the worst performing equity market ytd, out of larger EMs and DMs, down 6%, and 20% below January highs. At the same time, fresh stimulus newsflow is coming through and the Chinese-related indices could be due a bounce. Should one position for this? The new support measures might stabilize Chinese growth momentum, close to the 5% target, but could end up insufficient in helping drive any sustained upside. We note CNY is making fresh multi-year lows. Structural concerns remain significant, with the lack of confidence by the private sector, and the adjustment in real estate continuing. Demographics is a constraint; fiscal and monetary space to act is limited; and the risk of Japanese-style stagnation remains real, with a housing double dip the base case. We have been cautious on China over the past months, advising to fade stimulus-driven bounces. Our worry is that any rally might end up short-lived, and not lead to sustained medium-term gains, unless the real estate overhang reduces. With respect to the broader EM, EMs are this year underperforming DM by 11%, and even if one is to look at DM ex US, or EM ex China, EMs are struggling this year. While the Fed is likely to stop tightening, it could stay higher for longer. The EM FX index is making fresh lows. If USD keeps getting stronger, as we suspect, this was never a good backdrop for EM. In our global equity regional allocation, we stay cautious on EM vs DM. The EM basket has underperformed European indices ytd, and we stay away from it. Within it, while we are cautious on Miners, we note that they have already performed quite poorly, and, together with Energy which we are OW, can offer better relative value. In contrast, Luxury, Capital Goods, Autos and Semis did well in 1H, but are starting to stall, and there could be further weakness ahead. Defensives to work.

 

This podcast was recorded on 10 September 2023.

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