by Ivan Martchev
January 3 , 2024
On a relative basis, the performance of the MSCI Emerging Markets Index compared to the S&P 500 has been a disaster of epic proportions since about 2010. The theory goes that because the major emerging economies carry less financial leverage and grow faster from smaller bases on the very important GDP per capita metric, their stock markets should outperform. But that has not been the case for the major MSCI EM Index for a long time. India has outperformed and been a big standout, but that is one country only; most of the rest of the world has dramatically lagged. Some of this under-performance could turn for the better in 2024 if U.S. interest rates decline further and we avoid a recession both here and in China.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In the U.S., we have to deal with monetary policy lags, which are still unknowable, while the Chinese have a lot of problems in their real estate market as their government meddles in their economy a lot more than Western democracies do. They try to stop, then re-inflate, real estate bubbles by government policy – like forcibly reducing leverage for real estate developers – but they risk breaking the real estate market, as mortgages are tied to wealth management products and the domino effect is hard to control.
I don’t know if the Chinese economy will hit the wall in 2024, but it has avoided a recession for over 30 years with clever tactics like force-feeding loans, since the government controls the largest banks, and big infrastructure projects. I believe the Chinese think they have figured out a way to avoid business cycles but I am afraid they will find out that is not possible, even in the hybrid capitalism their economy follows.
There is too much borrowing in the Chinese financial system, much of it hidden in bank balance sheets. Most of their large companies, the state-sponsored enterprises (SOEs) are not run for profit but act as traffic controllers of trade of goods and services, which is another level of control that Beijing holds over the economy. The Chinese tend to create trade surpluses and deficits completely intentionally, as a long-term strategy, and in the case of the U.S., this tends to weaken the American position slowly over time.
No matter what you think of Donald Trump, I think he was right to start a trade war with China and I hope someday somebody finishes it, as China intentionally created imbalances on the Chinese side, and many American companies, driven by short-term profit objectives, fell into the long-term Sino trap.
Here are a few examples: How is it not a weakness that most advanced semiconductor manufacturing, without which the West cannot function, is done in Taiwan, which China plans to take back into the mainland fold while Xi Jinping remains in power, as he told President Biden the last time they met in San Francisco…or that many pharmaceutical compounds are made in China, or that China is the main source of rare earth metals, without which advanced electronics cannot be made? Those situations are developed by Western companies’ endless search for short-term profits while China has been playing the long game.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
While the Chinese Sun Tzu trade strategy has been executed well, the Chinese stock market has languished. Since their state-owned enterprises are not run for profit, the stock market does not go up, even though their economy grows. This is quite the puzzle for Western investors, who are used to seeing a strong economy correlated with a strong stock market, which has not been the case in China.
If you compare the main Indian stock benchmark to the main Chinese one, the outperformance has been staggering. If you start in the year 2000, India wins by over five-fold, so India is less developed but has been developing on more of a free market economic model, so it has produced the necessary profits for investors, unlike China, where GDP growth has been faster, but investors have been disappointed.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
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Ivan Martchev
INVESTMENT STRATEGIST
Ivan Martchev is an investment strategist with Navellier. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev
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