Equites are volatile globally but China is a big outperformer. Looking at rising equity volatilities, we conclude that markets are not ignoring downside risks; the point is that right now, the upside potential and downside risks for EMs especially are to a large extent unknowable. We think that in this situation, it makes sense for investors to step back and wait out the market volatility over the coming weeks.
Among EMs China has been the star performer in the equity space by a large margin. The performance of China’s MSCI Equity Index in dollar terms far outstrips comparable indices for other EMs. India is China’s closest competitor, but its MSCI Index is down 8.4% from its January high vs China’s 6.4% rise. All the other EMs that we follow are down more than 20% vs January highs, ranging from a decline of 22% in Philippines to a fall of 44% in Brazil. The outperformance of Chinese equities outside the EM world is noteworthy, too. The two major MSCI Indices for Chinese equities have turned in strong performances ytd vs the corresponding MSCI US Index. Despite declines in September, the A-share index is up 18.5% and the broad index, which is dominated by Hong Kong H-share listings and several Nasdaq stocks, is up 12.1%; by comparison, the US MSCI equity index is up 5.4%ytd (3dma in dollar terms for all indices). While the performance of Chinese shares trails the 25%rise in the NASDAQ ytd, it is far ahead of both the Dow and S&P.
There is no mystery to the secret of China’s success: it comes down to effective control of the virus and the right mix of fiscal stimulus and monetary caution. China has successfully brought the pandemic under control, as have South Korea and Taiwan (which we do not include among our EM countries). We would argue that the combination of strong fiscal stimulus and cautious monetary policies has put the economy on track to sustained economic recovery.