Emerging market stocks in Asia are up and about, with the MSCI Emerging Markets Index climbing by another 2% in August.
The rise was driven by growth in China stocks, with the MSCI China Index up by 5% last month. And given that it makes up 29% of the MSCI EM Index, stock price moves in China will have a material impact on the broader index.
Last month’s gains take the yearly increase for the MSCI China Index to an impressive 40%.
According to CE economist Oliver Jones, there’s a clear reason for that: tech stocks. The MSCI China tech index includes e-commerce giants Alibaba, Tencent Holdings and JD.Com.
This chart shows that while the China index has performed well this year, the rise in the tech/IT component has been almost twice as strong:
And despite recent concerns about a possible slowdown in China’s economy as regulators reign in excessive leverage, Stone expects the Chinese tech sector to remain resilient.
“Indeed, the share prices of firms in the IT sector often move independently of developments in the broader economy,” Stone said.
He cited the example of 2015, when capital withdrew from Chinese stocks amid fears that the country’s booming economy was about to experience a “hard landing”.
In that instance, every sector on the MSCI China Index fell except one – IT stocks, which weathered the storm and actually rose by 20%.
While the China stock index more broadly is more likely to feel the effects of an economic slowdown, Capital Economics aren’t in the doom and gloom camp when it comes to China’s near-term prospects.
Stone also said that on the basis of a price/earnings ratio, the valuations of Chinese stocks don’t appear stretched relative to developed markets.
That’s been due in part to the under-performance of Chinese stocks between 2010 and 2016, while developed market equities have steadily pushed higher.
Here’s the divergence:
It’s been a good year for emerging markets in Asia, which benefited from a weaker US dollar as foreign capital inflows drove prices up throughout the first half of 2017.
Although fund flows reduced in August, the MSCI China Index appears well-placed to withstand any near-term shocks in the Chinese economy.