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China and the Emerging Markets are becoming less attractive

Luxembourg, 27 September 2021 – The Emerging Markets are being dragged down by China where the government has created uncertainty with stricter regulation, while economic growth is cooling as well. “That’s why we are underweighting the Emerging Markets”, explained Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. Europe and the US are offering good alternatives.

“Recent regulatory measures taken by the Chinese government are certainly not unfounded and may positively impact the stability and transparency of China’s financial system in the future”, said Gerlinger. Nevertheless, they left investors unsettled, driving them to sell their holdings. The woes of Evergrande Group, China’s troubled property developer, haven’t exactly helped either. “On the positive side, the group has announced to make the interest payment on a bond. It remains to be seen whether it will actually do so. The company now has 30 days to make this payment”, Gerlinger pointed out.

In addition, most recent data keep showing that China’s economic growth is cooling. “The entire Asian region is currently being hit by the wave of the corona delta variant, which is weakening economies there”, said Gerlinger. The markets are not attractive at the moment, even though Asia, led by China, will remain a growth region with strong economic growth in the long term.

As the region’s superpower, China is not alone in this scenario: all throughout Southeast Asia, the mood has now become much more negative because of the pandemic. “Many countries were caught on the wrong foot by the fourth wave of Covid”, Gerlinger added. Nevertheless, the economic condition of Southeast-Asian countries continues to be significantly better than in other Emerging Markets.

Commodity-heavy Emerging Markets are generally benefitting from a global economic upswing, as is evident at present. The development of the Emerging Markets will, however, also depend very much on the further course of the pandemic. “Vaccination rates continue to be far too low as there is not enough vaccine available”, Gerlinger cautioned. “In addition, many governments have not exactly covered themselves with glory during the pandemic to date.” Brazil, led by President Bolsonaro, is a particularly stark example, but governments in Argentina and Peru are also under pressure for their corona policies. Accordingly, South American equity markets have not been convincing as of late.

Eastern Europe, primarily Russia, is also struggling with problems. Although rich in raw materials, Russia is under pressure because of its foreign policy ambitions. The West has imposed sanctions on the country following Russia’s annexation of Crimea. As a result, the country’s economic situation is much worse than it should be in view of the high commodity prices. Russian equities, however, have remained unimpressed by the price surge this year.

While it is unknown how long the uncertainties surrounding China will last, there may be a temporary counter-movement due to sharp price losses. Based on the positive economic outlook in Europe and the US, the Emerging Markets, and above all the Asian region, are becoming less attractive. “That is why we are halving our weighting in Emerging Markets from a risk perspective”, said Gerlinger. “We expect more certainty and clarity when assessing the macro-economic situation in Europe and the US. Consequently, weighting that is freed up from the EM will be allocated to Europe and the US.”

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