Is It Time To Get Excited About Chinese Equities?

Is progress actually being made toward the ever-elusive “trade deal” between China and the U.S.?

Thus far in 2019:

  • China’s equity market has been one of the best performers globally after a tough 2018. Part of this may be a recovery rally; part of it may be the recognition of various stimulative measures within China—plus the possibility of a trade deal.
  •  Beyond China, global equity markets have generally been rallying, as have global bond markets (whose yields have fallen) and the price of gold. Perception of high political risk and a global economic slowdown have been juxtaposed with a strong asset price rally.

Emerging Markets Charging Forward as the U.S. Federal Reserve Pauses for Now

One of the more remarkable transitions we’ve seen globally is how, in 2018, the Federal Reserve (Fed)was expected to hike policy rates four times, followed by three more increases in 2019. Merely 12 months later, we find ourselves wondering if they will hike policy rates at all this year.

When shifts like this occur, opportunities can present themselves within emerging market equities, because the U.S. dollar can move from being a headwind to a tailwind for unhedged returns.1 

  • In 2018, the dollar’s appreciation took away 4.50% from unhedged emerging market equity investors.
  •  Thus far in 2019, the dollar’s depreciation added nearly 0.75% to unhedged emerging market equity investors.

This can be addictive if markets also have a catalyst to change their view on a major market like China and shifts from a bearish to a bullish sentiment can occur.

China Is a Market That Moves in Sweeping Trends

One of the primary questions many investors face is whether to take exposure to a broad benchmark or whether a more country-specific basis makes more sense.

Figure 1 indicates the performance of the S&P China 500 Index, one of the broadest equity benchmarks for China, against the MSCI Emerging Markets Index.

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