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By Advisor Perspectives
While the MSCI China Index has been the best performing country index year-to-date (YTD) (+23%), concerns that the rally in emerging market (EM) equities may be over is premature. First, YTD, broader EM (+14.0%) and Asia EM (+15.3%) have underperformed the S&P 500 (+16.4%)*. Second, over the last year, China, EM Asia, and EM broadly have underperformed the S&P 500 by 10%, 11% and 13%, respectively. As a result, there still appears to be some catch-up ability on behalf of EM equities. Emerging markets, particularly in Asia, remain one of our favored regions for several reasons including:
- Improving Macro Environment | With the U.S. economy growing above trend, the environment for risk assets should remain healthy. U.S. growth is important to China as the U.S. accounts for ~19% of China’s exports, outpacing exports to Europe (~17%) and the rest of the emerging Asian economies (~13%). In addition, China’s growth appears to be stabilizing from coordinated fiscal and monetary policy stimulus. The implementation of an April Value Added Tax (VAT) cut lowered the VAT in manufacturing from 16% to 13% and in transportation and construction from 10% to 9%. Monetarily, the People’s Bank of China (PBoC) is expected to cut the reserve requirements for banks three additional times this year, adding more capital creation to the system. This week’s better-than-expected 1Q19 GDP (+6.4%), retail sales, and industrial production figures suggest that these policy moves are gaining traction.
Read more at Advisor Perspectives.
Photo: Thomas Fischler