China managed to move relatively quickly through the eye of the Covid-19 storm, enabling it to begin rebuilding its economy and its efforts are starting to pay off as the country is likely to make it back into positive territory when second-quarter growth statistics are published at the end of this week.
However, services continue to lag for behavioural reasons, she says. The return to non-essential purchases has been muted and weekend travel in China is still lower than before in an indication that consumers are not ready to return to weekend shopping yet. Another key element of its so far successful rebound is that it has engaged in targeted stimulus measures, unlike some of the advanced economies, which have implemented massive and far-reaching fiscal programmes to get money to hard-hit individuals and companies. The People’s Bank of China recently indicated that it would continue in the same carefully considered vein because it doesn’t want to fuel markets with liquidity.
In addition, cross-border capital flows into China have been increasing, according to the PIIE research, both in terms of foreign direct investment and portfolio inflows. The graph below shows the increase in foreign ownership of stocks and bonds, which reached RMB4.2-billion by the end of the first quarter of 2020.
Blackrock’s Li says frosty tensions between the two superpowers are here to stay, but there is still reason to be cautiously optimistic on the investment outlook for China. The risk of decoupling makes it even more important to hold China as a standalone investment, she adds. The graph below was produced by Lazard and highlights how quickly financial market conditions can change, with emerging markets experiencing a tale of two halves during the first half of 2020. For instance, South Africa saw equity market returns plummet 48% from the start of 2020 to 23 March 2020, when financial markets reached their nadir after a bear market sell-off. By 30 June 2020, however, South African equities had managed to turn around virtually all those losses, rallying by 47%.
However, investors will need to be selective and invest based on the particular risk/return potential of each country. ING says the heterogeneity of emerging market economic performance means that deviations across regions and countries are likely to be substantial.Asia is faring best and facing a more modest contraction, with the IMF World Economic Outlook seeing the region slipping 0.8% in 2020, but then rebounding a healthy 7.4% in 2021.
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