International Finance: China reopening is mixed blessing for emerging-market assets

For stocks, it’s a boost as it promises to raise consumer demand, improve corporate cash flows and revive trade volumes. For currencies, however, it could be a drag by reducing real yields via inflation, pressuring China’s current account and delaying a policy pivot by the Federal Reserve. For bonds, it’s a mixed offering.

Developing-nation stocks and currencies have made the strongest start to a year since the 1990s, and bonds are posting the best gains in more than a decade, as investors who stayed on the sidelines during China’s pandemic struggles are coming back. GAMA Asset Management turned bullish on emerging markets last month. Fidelity International, which was bearish for most of the past year, is now overweight the assets, favouring China and Latin America.

Some analysts are going a step further and raising the spectre of stagflation — a period of high inflation coinciding with little growth. The concern that the Fed would cite inflationary pressures coming from China to stay hawkish also weighs on the outlook. For now, though, most investors are happy to ride the rebound and its spillover into emerging markets. Emerging-market stocks rose on Monday and the average sovereign risk premium narrowed 9 basis points to 453, according to JPMorgan data.

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