Emerging markets hit hardest by Chinese repression and coronavirus outbreaks

Growing investor concern about China and the widening vaccination gap will put pressure on emerging market assets relative to their developed market counterparts, some market participants said.

https://exness1.org/ believes China's massive suppression of the technology sector at a time when its economy is slowing has helped push the global emerging market equity index to a 17-year relative low compared to its developed country peers. 

The spread of coronavirus variants has also contributed to vaccine adoption in developing countries lagging behind the likes of North America and Europe.

Stock markets in the US and Europe are expected to continue to perform better as developed economies recover, travel resumes and vaccination approaches collective immunity.

"We forecast that developed markets will do better for the rest of the year," said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. " Emerging markets face more pressure from Covid and more uncertainty about new options given the lower level of vaccination."

The MSCI Emerging Markets Index, which accounts for about a third of the weight of Chinese companies, fell briefly into negative territory for the year last week, while the MSCI World index of developed market shares rose about 15%.

The MSCI Emerging Markets Currency Index was down more than 1% from its June record, while the US dollar rose, a traditional drag on emerging markets.

Rapid reversal

The deterioration in emerging market sentiment came after cohort growth dominated the final months of 2020 and early this year. Investors invested in economically sensitive stocks as part of the so-called reflationary trade after China became the first major economy to recover from the pandemic.

China has now become something of a pariah, suppressing private enterprises, which it accuses of exacerbating inequality, increasing financial risks and questioning the power of government. Meanwhile, the world's second-largest economy is experiencing an outbreak of the delta variant, causing analysts to lower economic growth forecasts as risks rise.

The highly contagious variant has spread to almost half of China's 32 provinces in just two weeks. At least 46 cities have advised residents to refrain from travelling unless absolutely necessary.

"We have for some time taken a neutral stance on emerging markets, largely due to a combination of tight policies and lower growth in China," said Patrick Covid, global multi-asset strategist at JPMorgan Asset Management. "Covid's latest developments reinforce our caution and further cloud the overall outlook for emerging markets."

Nevertheless, investors are not abandoning emerging markets entirely, especially given the importance of China's large and liquid market. The national benchmark CSI 300 index rose 2.7% on Monday, its highest level since May. Traders invested a net $975 million in Chinese exchange-traded funds last week, more than from all other emerging markets tracked by Bloomberg combined.

Access to vaccines

The International Monetary Fund warned late last month that unequal access to vaccines was further widening the recovery gap between developed and developing countries. It lowered its growth forecast for emerging economies from 6.7% to 6.3% and raised estimates for advanced economies by 0.5 percentage points to 5.6%.

While the percentage of fully vaccinated people rose to around 50% in the USA and the European Union, it stood at around 20% in Brazil, 8% in India and Indonesia and just 4% in the Philippines.

Vaccine availability has a direct impact on the rate at which new businesses open in different countries and is a key issue for investors," said Jijian Yang, head of Asia Pacific at Allianz Global Investors, which specialises in several assets.

"Going forward, it comes down to which countries can effectively immunise their populations as early as possible against unknown elements such as new variants of the virus," he said. "From that perspective, developed markets are really outperforming developing markets at the moment."