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Insights
Is the Sun Rising in the East? The Case for EM Asia
As more economies continued to re-open in June, risk assets saw further strong performance. The MSCI World Index advanced by 2.7%, and US equities continued to lead developed markets as data there began to point to a strong recovery in the economy. US equities also saw strong gains on Thursday last week, leading into the holiday weekend, as nonfarm payrolls posted a robust gain of 4.8 million new jobs.
MSCI EM Asia has seen less fanfare, even while advancing 8.2% in June. Chinese equities, which make up more than half of the index, rose 9% last month to drive performance. Although returns have already been strong for EM Asia since the depth of the crisis, there are certain factors that could help drive returns in the coming months.
Despite fears of a second outbreak, as new cases were discovered in Beijing, China has proved more than able to control the situation, with the number of new cases already beginning to trend lower again. The isolated outbreak also does not seem to have had any impact on economic momentum after it was announced; indeed, momentum has continued to look strong with a higher than expected Caixin PMI announced for June.
The People's Bank of China (PBOC) has also helped to fuel the recovery, with policy responses that have proven to be prudent but accommodative. The PBOC has focussed on improving lending conditions to help boost business sentiment, while also leaving room for further rate cuts in the future, if required.
The largest clouds that still hang over sustained Chinese equity momentum are flare-ups in US-China trade and geopolitical tensions, fuelled by further restrictions imposed on Hong Kong by the Chinese government. However, even here, more recent trends have appeared more positive. We recently saw the first meetings between the US and China since January, with both sides describing the talks as being constructive.
Other countries in the index have also seen a bounce back in activity, with exports in Korea rising to $39.2 billion from $34.9 billion in May. Although Korea has also seen worrying signs of secondary outbreaks, the country also has one of the strongest capabilities globally in terms of tracing where outbreaks can flare up. So far the outbreaks have been quickly contained.
India also saw a bounce in its manufacturing PMI, rising to 47.2 in June from a previous reading of 30.8. The reading suggests that things may be starting to return to normal as India continues to progressively ease its lockdown.
On top of these more regional factors, the MSCI EM Asia is largely overweight to sectors that have seen strong performance throughout the crisis and that could continue to be areas of interest for investors, such as Information Technology and Consumer Discretionary. Both sectors have seen expected earnings growth hold up better than other sectors.
Holdings Breakdown of MSCI EM Asia Index
Country Breakdown
Sector Breakdown
Source: FactSet, as of 30 June 2020. Index weights are as of the date indicated and should not be relied upon as current thereafter.
Top 10 Holdings
Source: FactSet, as of 30 June 2020. Index weights are as of the date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
How to play this theme
Investors can play the EM Asia theme described above with a SPDR ETF. To learn more about the fund, and to view full performance history, please follow the link below:
Flows
European-Domiciled ETP Segment Flows(Top/Bottom 5, $mn)
European-Domiciled ETP Asset Category Flows($mn)
Sources: Bloomberg Finance L.P., for the period 26 June-3 July 2020. Flows are as of date indicated and should not be relied upon as current thereafter.
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Exp. Date: 31/07/2021