Sylvia Sheng

Macroscope | Bolstered by China, emerging market equities have potential for resilience amid US recession risks

Emerging market stocks have had a lacklustre year so far compared with developed markets. However, the Chinese economy is still on the path to recovery, with policy easing looking increasingly likely

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An electronic board shows stock indices at the Lujiazui financial district in Shanghai on March 17. Photo: Reuters

Sylvia Sheng

Published: 10:30pm, 2 Jun 2023Updated: 2:25am, 3 Jun 2023

Emerging market equities’ year-to-date returns have lagged behind those in developed markets. This divergence has occurred despite a rally in global equities, a weaker US dollar and strength in the Chinese economy, which usually provide a fertile backdrop for emerging nations’ equity markets to outperform.

Two main factors have driven the lacklustre performance so far this year. First, developed economies have held up much better than many had expected at the start of the year. This is especially so for the US economy, which has remained resilient in the face of aggressive monetary policy tightening by the Federal Reserve since last year.

While US headline first-quarter gross domestic product growth fell short of market expectations, it was mainly dragged down by a decline in inventories. Domestic final sales, which is a better gauge of underlying US domestic demand, jumped 3.3 per cent at an annual rate, the strongest performance since the second quarter of 2021, led by household consumption. Recent labour market data also pointed to continued strength, with strong payroll employment increases in April and the unemployment rate at multi-decade lows.

In Europe, the natural gas crunch during winter was less harmful than seemed likely due to a combination of LNG imports and mild weather. As a result, private-sector sentiment has improved in recent months helped by falling gas prices.

Meanwhile, economic recovery in Japan is gathering strength, driven by a rebound in private consumption amid improving wage momentum.

Second, the strong post-reopening recovery in China has generated limited positive spillovers in the rest of emerging market economies. Since reopening in January, China’s economic recovery has been mainly led by a rebound in services consumption as pent-up demand is released, while manufacturing activities have remained weak, as reflected in the May’s purchasing managers’ indices.