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Key emerging markets stabiliser is… China?

Oil independence an important factor, says S&P

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Elena Johansson

John Welling, associate director of equity indices at S&P Dow Jones Indices (pictured), has highlighted China’s role as an “unexpected stabilising force” among emerging markets amid the coronavirus crisis.

In a blog, Welling pointed to its outperformance of more than 20 percentage points in the first quarter compared to the broader emerging markets.

He said that China A-shares helped mitigate the tumbling performance of emerging markets.

They were recently added to the S&P Emerging BMI at a 25% partial inclusion rate and account for a 7% weight.

Alibaba (down 11.5% in Q1) and Tencent (down 1.58% in Q1) contributed to the outperformance, he said.

The two companies are among the largest in the S&P China BMI, with an approximate weight of 14% and 12.8% in the index, respectively.

In the last three months, the realised volatility of the S&P China BMI remained largely below that of the S&P Emerging BMI.

“Despite being the epicenter of the outbreak, Chinese equities have experienced lower volatility, minimal currency fluctuation, and less exposure to falling oil prices in the recent market environment in comparison with emerging market peers,” Welling noted (see charts below).

Oil export

China’s economy was also less impacted as it is a non-oil-exporting nation, he said.

The index total return of oil-exporting countries Brazil and Russia plummeted by 50.2% and 35.8%, respectively, in the S&P Emerging Markets BMI.

China’s dropped by 10.3% in comparison (see table below).

Welling believes that China and Taiwan’s oil-importer status has helped reduce some economic risk.

Equity losses in South Africa, Mexico, Brazil and Russia, however, were exacerbated by extreme local currency weakness versus the US dollar.

Covid-19 has introduced a large amount of uncertainty into commodity and equity markets, and emerging countries have particularly suffered from the projected impacts, Welling noted.

Gradual resumption of economic activity

Meanwhile, China appears to be on the path back to normalisation.

Aneeka Gupta, director, research at WisdomTree, said that quarantine arrangements are being loosened rapidly by local authorities across China.

“We have observed industrial sectors resuming at a faster pace relative to the consumer and service sectors owing to loss of employment and household income.

“Overall consumption is at 85% of normal levels, while online spending is back to normal levels.

“However, large ticket items like autos and home sales and travel-related categories remain well below normal levels,” said Gupta.

She expects further stimulus to help support demand.

The official purchasing managers index (PMI) is signalling a recovery as well.

After declining to a record low of 35.7 in February, it rebounded to 52 in March, which is above 2019 levels, according to the National Bureau of Statistics of China.

Additional policy stimulus needed

But the recovery coincides with slumping external demand from the rest of the world.

The kickstart of Beijing’s economy will also need appropriate monetary and fiscal policy, Gupta suggests.

In February, the Chinese government rolled out fiscal support of over RMB1.2trn (€156.8bn) and indicated plans to issue special treasury bonds, WisdomTree said.

“However, these measures fall short of what we have seen outlined by other developed market economies.

“We expect China to see a rebound in GDP by the second quarter of 2020 supported by additional fiscal and monetary stimulus measures,” she said, despite strong headwinds, such as weak global external demand, lower domestic consumption and further supply disruptions.

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