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Patrik Schowitz
Patrik Schowitz

Macroscope | China the key reason emerging market equities missed out on 2021 global rally

  • Strong corporate profits in a rebounding global economy lifted stock markets in the developed world but not those in emerging markets
  • China’s slowing growth, property sector jitters and the government’s regulatory crackdown all played a part in weighing down Chinese assets

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People walk past an electronic board displaying the Hang Seng Index in Hong Kong on November 29. 2021 has been a good year for global stocks, but as many investors in Asia know, not every region’s equity market had such a good year. Photo: EPA-EFE
Patrik Schowitz

As we near the end of a stellar 2021 for global equities, it is worth asking what drove this, and how may 2022 compare?

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2021 was a very strong year for global equity markets. Even after the recent pullback, sparked by worries over the Omicron variant of Covid-19, global equity indices are still up by around 15 per cent since the start of the year. However, as many investors in Asia are painfully aware, not every region’s equity market had such a good year.

The strong global numbers hide a large divergence between developed and emerging equities. While developed equity markets in aggregate have risen to nearly 20 per cent this year, emerging market equities are slightly down.

Looking back, it is fairly easy to see that the surge in global markets was primarily driven by strong corporate profits in a rebounding economy. So strong have profits been that valuations – as measured by price-to-earnings (P/E) ratios – have actually become less demanding over the year, despite strong price gains.

From the peak in September 2020, the P/E ratio for global equities has fallen by nearly 10 per cent. Strong profits also allowed developed market equities to ride out a range of headwinds such as repeated Covid-19 waves, rising inflation and increasing worries about tightening monetary policy in the US.
An oversized ornament is hung from a giant Christmas tree erected outside the New York Stock Exchange on November 30. The surge in global markets was primarily driven by strong corporate profits in a rebounding economy. Photo: AP
An oversized ornament is hung from a giant Christmas tree erected outside the New York Stock Exchange on November 30. The surge in global markets was primarily driven by strong corporate profits in a rebounding economy. Photo: AP

How to account for the underperformance of emerging market equities? The problem clearly was not earnings underperformance – far from it. Expected profits growth of 55 per cent for emerging market equities in 2021 should actually slightly beat that in developed markets, with US growth expected to come in at around 50 per cent and Europe only slightly higher than that for emerging markets.

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