The Point

China’s showing weak growth, but strong market returns. Here’s why

What do weak growth and strong market returns in China mean for investors? Here’s an explanation from Pendal’s Global Emerging Markets Opportunities team

• Tech and dollar diversification drive China interest
• Weak economic indicators contrast with strong equity returns

Equity markets haven’t yet noticed a narrowing risk gap between developed and emerging markets

How to identify emerging markets benefitting from a weaker US dollar

A weaker US dollar is creating support for emerging-market equities – but not all countries will benefit equally.

The US Dollar Index – which measures the USD against other major currencies – is down about 10 per cent this year.

EM returns have historically been strongest when the US dollar is weak, because servicing US-dollar debt becomes cheaper; domestic purchasing power in EMs improves; and cheaper imports help keep inflation under control, creating room for rate cuts.

Still, while EM performance lifts as the US dollar weakens, the effect is uneven and investors should be discriminating in country selection, cautions Pendal’s EM team.

Economies with a current account deficit – common in Latin America and South-East Asia – benefit most from cheaper borrowing, lower imported inflation and stronger consumer demand.

But big exporters that run a surplus such as Taiwan and Korea can face headwinds as their products become more expensive in US-dollar terms.

‘Emerging markets crisis’? That’s a wildly overstated view, say our experts

Some analysts have described a pattern of a weaker dollar and rising bond yields in the US as a ‘classic emerging markets crisis’.

“As veterans of actual emerging crises dating back to 1994, we consider that view to be wildly overstated,” writes Pendal’s EM team in their latest analysis.

In spite of volatility and weakness in core US financial markets, the currencies of almost all emerging markets strengthened against the US dollar in March and April. Meanwhile bond yields fell for the majority of major EMs.

“Emerging markets are driven by two major global drivers: international capital flows and international trade.

“A weaker dollar represents capital flowing out of the US and into the rest of the world – and a weaker dollar has consistently been positive for emerging markets over the past 30 years.

“Although evolving tariff policies threaten a downturn in global trade, the message from financial markets is that investor uncertainty about US economic policies is a clear positive for emerging economies and for investors in emerging markets.”

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