You have to love the market. As soon as an investment is utterly hated, it springs to life with incredible vigor. China might have been the worst place to invest since 2021, falling roughly 60% through January of 2024. ‘Univestable’ is what we were told. Since that time, however, that market has been the best performing major country rallying 25%, bringing the entire emerging markets space with it, for a gain of 11%. As a reminder, China is about 30% of the emerging market index.
The poor performance since 2021 definitely had its merit. Poor handling of COVID, real estate concerns, geopolitical tensions, antagonism towards foreign investment and lack of internal stimulus led to poor growth and, ultimately, a poor earnings picture. But perhaps we are starting to see some green shoots in their economy. Chinese manufacturing activity is now growing at a 14-month high, with positive readings since the middle of 2023. Additionally, our friends at Alpine Macro see green shoots in the real estate sector as leading indicators to investment have turned slightly higher. This has led economists to increase GDP estimates from 4.5% to 4.85% in 2024.
Source: S&P Global, as of 4/29/2024
All the while China and emerging markets remain one of the cheapest markets in the world. When investors HATE something – an idea, stock, country – it is usually reflected in a very low valuation, and the opposite is also true. In 2009, all major indexes traded around the same value, as seen in the chart below. Since then, the U.S. has been the dominant market and now you have to ‘pay up’ for that investment choice compared to the rest of the world. It doesn’t mean the U.S. is now a bad place to invest, but perhaps it is once again time to think about global exposure with emerging markets trading at 12 times forward earnings (orange line) compared to 20 times in the U.S. (blue line).
Source: Bloomberg, as of 4/29/2024
Sean Dillon, CMT, CFTe
SVP, Investment Strategy
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