China Continues to Drag Emerging Markets into 2024

February 7, 2024 |
2 minute read
|

2023 marked the third year of drawdowns for the Chinese equity markets, reflecting a country still trying to emerge from the pandemic period. A combination of factors continued to hamper the once booming economy causing the MSCI China Index to tumble 11 percent during the year. In conjunction with a strong year for Taiwan and India, both posting double digit returns, the spread between MSCI Emerging Markets Asia, with and without China, was 16.3 percent in 2023.

While many viewed China’s growth prospects positively going into 2023 due to expected easing of the nation’s strict pandemic policies, the “reopening” fell flat amid continued disinflationary pressures and significant stress in the banking sector. In addition, other emerging markets including Mexico, Taiwan, Vietnam, and India have encroached on China’s share of U.S. imports in recent years. Many view this as a new regime for U.S./China trade relations in which the U.S. continues to distance itself from unilateral supply chain dependence. 

On the mainland, China’s consumption did not bounce back as expected leading to a period of economic stagnation. People’s Bank of China yields have slumped while the government discusses a possible rescue package of $278 billion, on concern this will not be enough to cover for the Evergrande insolvency (and broader real estate distress) which has left the property market in a precarious situation. For reference, Evergrande, one of China’s largest property developers, was ordered liquidated by a Hong Kong court in late January. 

Another stress point for the equity markets was the 2023 year’s selloff triggered in part by “snowball” derivatives, which are linked to the value of Chinese equity indices such as the CSI500 and CSI1000. Snowballs are a structured derivative sold in China that offer to pay investors bond like coupons if the indices stay within a predetermined range. The snowball market is estimated to be worth approximately $45 billion with about one third of the market near knock-in levels (index level at which the positions begin to lose money). Analysts speculate that the snowball derivative activity is not large enough to significantly impact the market but concede that the macroeconomic environment, slow real estate market, and strained U.S.-China relations are severe headwinds to overcome. In aggregate, all these factors will continue to weigh on risk sentiment in China.

CHT-ChinaDragsDownEM

This Chart of the Month shows how China’s poor performance has caused a drag on Asian emerging market performance by displaying the indexed performance of the MSCI Emerging Markets Asia as well as the MSCI Emerging Markets Asia ex. China. The indices largely tracked each other throughout 2019 and 2020. However, China’s sustained strict pandemic policy hindered returns throughout 2021 and 2022, while regional peers continued to grow. After continued weakness in 2023, paired with significant strength from countries such as India (which recently became the most populous nation and surpassed $4 trillion in market capitalization), the underperformance has amounted to nearly 39 percent on a total return basis since December 31, 2018. With an uncertain path forward for China, emerging market country selection remains paramount as regional outcomes continue to diverge.

Cameron Dyer

Author

Cameron Dyer

Analyst

Arjun Sawai

Author

Arjun Sawai

Associate

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

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To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.