China’s hyped decoupling from emerging markets may prove a blip, fund managers say
- Chinese equities are seen making up lost ground as the extreme pessimism toward its economy recedes
- At the same time, the gathering enthusiasm over other developing-nation equities could peter out amid a global slowdown
“I’ve seen this decoupling story many times in the last two plus decades, it never pans out,” said Zhikai Chen, head of Asian and global emerging market equities at BNP Paribas Asset Management, which oversaw the equivalent of US$504 billion globally at the end of June. “From a trade flows perspective, and how big the Chinese economy is for commodity demand, it seems a heroic assumption.”
The MSCI China Index has dropped about 6 per cent over the past month, whereas a similar MSCI gauge tracking the rest of emerging markets has jumped 7 per cent in the same period. The same disparity has also emerged in bond markets with Chinese debt eking out a gain of under 1 per cent, compared with a 4 per cent return for emerging markets as a whole.
Meanwhile, increasing doubts are arising over the rest of emerging markets.
The dollar has started to strengthen again from a low set earlier this month, slowing foreign fund inflows into developing nations as a whole. Financial conditions are also tightening globally as central banks raise interest rates to rein in inflation, weighing on the growth outlook for many emerging economies. Close links to the slowing US economy are also set to drag down performance.
“In the long-term, whether emerging markets can ‘decouple’ from a slowing China to outperform depends on their starting valuations and whether they have growth drivers outside of exporting commodities to build Chinese houses and infrastructure,” said Ian Samson, a fund manager at Fidelity International in Hong Kong.