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Macroscope
OpinionComment
Sylvia Sheng
Sylvia Sheng

Macroscope | China is set to lead emerging market equities out of the doldrums amid Covid-19 headwinds

  • China is revving up its engines of growth by relaxing interest rates and releasing fiscal stimulus while the US and Europe tighten policies and rates to fight inflation
  • But near-term risks remain, especially from Covid-19, so solid improvements may not be seen until the next quarter

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A worker checks excavators at a construction machinery company in Yantai, in China’s Shandong province, on January 17. In China, the release of fiscal stimulus is under way with clear support for infrastructure investment. Photo: Xinhua
Sylvia Sheng

Last year was a challenging one for emerging market equities. The MSCI Emerging Markets Index dropped by almost 5 per cent, while its developed market counterpart rallied by more than 20 per cent, leading to its worst performance since 2013.

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However, the situation seems to have reversed since the start of this year with emerging market equities faring better than their developed market counterparts. Could we see a return of emerging market equity outperformance in 2022?

One factor likely to work in favour of emerging markets is China’s policy easing. The performance of Chinese equities is key to the outlook for emerging market equities, given that it accounts for around a third of the overall emerging market index.

Amid China’s normalisation of monetary and fiscal policies, and its regulatory tightening of the property, technology and high-emissions sectors, the MSCI China Index was down more than 23 per cent last year.

Beijing has moved to a modest easing mode since last July and we have seen a more dovish shift in recent months, which is likely to boost investor sentiment for Chinese equities. Chinese policymakers have rolled out several monetary and fiscal easing measures recently.

A woman stands in front of signage in the lobby of the People’s Bank of China headquarters in Beijing on June 7, 2019. China’s central bank has been easing rates. Photo: Bloomberg
A woman stands in front of signage in the lobby of the People’s Bank of China headquarters in Beijing on June 7, 2019. China’s central bank has been easing rates. Photo: Bloomberg
In addition to injecting liquidity through quantitative tools, such as cuts in the banks’ reserve requirement ratio in December, the People’s Bank of China (PBOC) has cut interest rates in recent weeks to help lower funding costs for businesses.
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