Emerging Opportunities Beyond China

July 27, 2023 | Catherine Callaghan, Associate Research Analyst

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF document in the web post. General description: Two-line chart shows cumulative returns of the MSCI Emerging Markets and MSCI Emerging Markets ex-China indices. Chart subtitle: Equity performance has held up better in emerging markets ex-China. Chart source: Bloomberg as of July 21, 2023. Chart visual description: Data is daily, from June 28, 2019 through July 21, 2023. Y-axis is labeled “Cumulative Returns” and spans from -40% to +50%. X-axis is labeled in MMM-YY format in increments of two months; labels begin with Jun-19 and end Jun-23. MSCI Emerging Markets line is plotted in dark brown and Emerging Markets ex-China line is plotted in light brown. Beginning in July 2021, there is a shaded area behind the lines in light teal. Chart data description: Since July 2021, the MSCI EM ex-China has outperformed the broader index. Please contact us for the full dataset. End chart description. See disclosures at end of document.

Equity performance in China, with the MSCI China Index down 5.5% through the first half of the year, has disappointed amid hopes for a strong post-COVID recovery. While macro data started the year strong, momentum quickly waned, with a cautious consumer and a slowdown in manufacturing. China’s property sector troubles have continued, and U.S./China tensions remain, with the U.S. moving toward stricter regulation and reduced investment in the Chinese technology sector in 2024. Along with human rights concerns and the general unpredictability of the Chinese government, the debate around China’s investability continues on.

Take China out of the emerging markets picture, however, and the story is different. The MSCI Emerging Markets Index excluding China — the largest single country weight in the index at nearly 30%¹ — has outperformed the broader benchmark since late 2021. Latin American countries like Brazil and Mexico — almost 6% and 3% weights in the index, respectively — have benefited from central banks that began their monetary policy tightening cycle earlier. Additionally, as renewable energy trends continue, Latin American regions rich in natural resources should see exports grow. Nearshoring trends have also benefitted emerging market countries such as Taiwan — the second largest country weight in the index at nearly 16% — and Mexico, with the latter exporting nearly as much to the U.S. as China, something not seen since 2003. And in India — the third largest country weighting in the MSCI EM Index at approximately 15% — government reform programs have drawn in significant investor flows.

Looking into the second half of the year, the evolving macro picture in China, including any potential stimulus, will continue to be a driving factor of overall MSCI EM performance. And outside of China, there are a number of interesting trends playing out across the emerging markets space that should present investment opportunities for active managers.