Bloomberg — For the past three decades, China’s economy has been a dominant factor in emerging markets for economic and corporate growth. Goldman Sachs Group Inc. strategists say that’s now changing.
Calling it an “ongoing long-term divorce,” the US bank said the impact of slowdowns and downgrades in the world’s second-biggest economy on other developing nations has declined “precipitously” over the past three years. That suggests China’s current bout of macro problems and a stocks selloff may not drag down emerging markets as they would in the past.
“The spillovers from Chinese growth revisions appear to be declining over time,” strategists Caesar Maasry, Jolene Zhong and Lexi Kanter wrote in a note Monday. “Earnings-per-share data, coupled with the diverging growth differentials of emerging markets ex-China and China, do suggest there is a slow divorce occurring — an observation we think most investors will take solace given the current concerns.”
China occupies around a third of the weight in key emerging-market indexes for stocks and bonds, while the assets of many countries such as South Africa are sensitive to data and policy statements coming from Beijing. That’s meant indexes can be skewed by small changes in China’s performance. China’s massive size, with a $10 trillion stock market and $19 trillion bond market, also crowds out fund flows into emerging markets.
But now, the links are fading because of the domestic and service-orientated nature of China’s lockdowns last year and the subsequent reopening of its economy, the strategists said. Relative equity performances are at the core of this divergence.
There were two “drawdowns” of 10% each this year in the MSCI China Index due to lackluster growth figures but the MSCI ex-China gauge posted a gain during the first episode in May and fell less in the second in August, they said.
“The current concerns regarding recent onshore bankruptcies and missed payments of financial firms have sent a stronger ripple across global markets than the concerns of a weaker domestic demand earlier in the year,” they said.
A Goldman analysis of revisions in earnings estimates show high correlations between China and global markets during 2010-2018, but this gave way in the 2019-2023 period when EPS revisions in China had little or no correlation with the rest of the world.
While some of the correlations are normalizing and nations within the emerging world still show sensitivity to China, the overall decline in the influence of China’s economy and earnings changes will continue, Goldman’s models showed. Middle Eastern and Indian equities may be “attractive places” to hide from China’s problems, while Korea is a top pick, they said.
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