The standout performer in June has been emerging markets (EM) both during market surges and pullbacks. One month does not make a trend, but it is worth looking into the drivers of a purportedly “risky” trade that has featured both positive upside and downside capture ratios. Who would have thought that EM was the place to be, with all the “fits and starts” of re-opening the world’s economies? One thing for sure is that emerging markets are not “your father’s Oldsmobile.” The original BRIC — Brazil, Russia, India and China — which put Brazil first and China last is long gone.
FactSet’s GEOREV — exposure by geographic revenue by country — shows that China’s revenue contribution to EM is now over 40% and has increased more than 20% in one year. This has to do with MSCI increasing the weight of China “A” shares in the MSCI Emerging Markets index, from 5% to 20% between October 2018 and October 2019. Meanwhile, China is acting forcefully to boost its economy through this COVID period, which is helping its markets significantly and thus EM as well. Year to date through yesterday’s close, the Shenzhen Stock Exchange A Share index is up about 13%, more than the NASDAQ. Investors no longer can avoid considering China in building well-diversified portfolios.
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