Opinion | India and South Korea show emerging markets offer alternative to US, China economic doom and gloom
Furthermore, respondents’ expectations about growth in China plunged to their lowest level since widespread lockdowns were in place last year.
Yet, if concerns about a hawkish Fed and a sharp downturn in China have caused developing economies to fall out of favour with investors, why is an exchange traded fund tracking an index of emerging market stocks that excludes China up 8.2 per cent this year?
This is debatable, particularly given the sharpness of the sell-off in emerging markets since early August. Although worries about the Fed’s hawkish stance are largely to blame, the property-driven downturn in China is clearly a factor.
While there are concerns about the lofty valuations of Indian stocks – which have a 15 per cent weighting in the benchmark MSCI emerging markets index – they continue to benefit from a fast-growing economy, strong corporate earnings and, crucially, India’s appeal as an alternative to China.
South Korean companies increasingly see India as viable alternative to China
South Korean companies increasingly see India as viable alternative to China
South Korea is another market that has outperformed the broader index. Although the global semiconductor industry is in the midst of a downcycle, the hype around generative artificial intelligence has lifted sentiment towards South Korea’s technology-heavy stock market, which is up more than 13 per cent this year. Goldman Sachs believes Korean equities will continue to outperform, especially if the United States enjoys a soft economic landing.
Furthermore, many emerging market central banks were ahead of the curve, raising interest rates long before the Fed began to tighten policy aggressively. With inflation now falling more sharply than in developed economies, this has created space for rate cuts.
Sentiment, moreover, remains grim. Even if plunging Chinese stocks and surging US shares are excluded, emerging-market equities are still performing poorly against their peers in advanced economies.
Even so, there are grounds for cautious optimism. Not only are emerging market stocks trading at a 31 per cent discount to developed market shares, global investors are still “massively under-positioned” in developing economies, according to JPMorgan. If China’s economy stabilises or if the Fed makes it clear it is done raising rates, emerging markets could bounce back.
While there are risks aplenty and it has been two decades since developing economies enjoyed a multi-year bull market, it is not all doom and gloom.
Nicholas Spiro is a partner at Lauressa Advisory