China's economic recovery plus the Fed's easing cycle and a soft landing for the U.S. are crucial for emerging-market stocks, say analysts.
Hello! This is MarketWatch reporter Isabel Wang, bringing you this week's ETF Wrap. In this edition, we look at China-related ETFs and emerging-market funds - which surged over the past week after Beijing unveiled a stimulus package aimed at reviving the country's flagging economy - and why investors should treat this rally with caution.
Exchange-traded funds that hold Chinese equities soared this past week as investors cheered Beijing's commitment to arrest a slowdown in the world's second-largest economy. Investors are eager to know if the long-anticipated recovery in Chinese stocks has finally arrived.
The iShares MSCI China ETF and the iShares China Large-Cap ETF surged around 19% this week to post their best weekly performance on record. Meanwhile, the Invesco Golden Dragon China ETF and KraneShares CSI China Internet ETF were up 23.3% and 26.8% in the same period, respectively, with both logging their best week since 2022, according to Dow Jones Market Data.
Broader emerging-market funds also rose this week, with the iShares MSCI Emerging Markets ETF up 6.7%, according to FactSet data.
On Tuesday, the People's Bank of China(PBOC) said it would cut interest rates and lower the amount of cash that banks need to hold in reserve, in a bid to kickstart its ailing economy. Policymakers also said they would reduce the interest rates on existing mortgages and lower the down-payment ratio for second-home purchases.
But that's not all. Two days later, China's top political leaders pledged to deploy "necessary fiscal spending" to pull the economy back toward the government's annual growth target of 5% and stabilize its battered property sector. While the government did not offer details on fiscal spending, Reuters reported late Thursday that China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of a fresh fiscal stimulus to boost consumption and help local governments tackle their debt problems.
Can Beijing 'follow through' this time?
Investors now are wondering whether Beijing's stimulus bazooka will provide enough fuel to turn around a beaten-up Chinese stock market and, more importantly, the economy.
"The reason that the market has reacted so strongly is that there's been a very clear change in the tone of policymakers in Beijing, which is the best sign yet that we're on the verge of getting the kinds of stimulus that the market wants," said Phillip Wool, chief research officer and head of portfolio management at Rayliant Global Advisors.
However, Wool said that whether the stock rally will pick up more steam from here depends on whether Beijing "follows through" and "actually implements detailed policies based on what they've said."
Over the past year, China has rolled out a slew of economic stimulus measures aimed at boosting the economy, but disappointing data over the past few months still raised concerns over a prolonged structural slowdown. That's why investors have been clinging to hopes that China will deliver a massive fiscal stimulus package - a policy tool used by Beijing to great effect in 2008.
Chinese equities have trailed the U.S. and other emerging markets over the past year, with the China-focused MCHI losing 2% over the 12 months through last Friday, compared with the S&P 500's 30% advance and the iShares MSCI Emerging Markets ex China ETF's 19.3% gain in the same period, according to FactSet data.
Scott Ladner, chief investment officer at Horizon Investments, said the "Chinese equity-centric market reaction" over the past three days has left some investors "confused," as they haven't yet seen a global stock-market rally after China finally pulled the "fiscal bazookas out to reflate their economy."
In Ladner's view, the "powerful pro-growth signal" from Chinese officials should have significantly buoyed European stocks, U.S. small caps and value stocks, but their reactions were relatively muted. "It's not the kind of cross-market reaction investors expect to see," he told MarketWatch via phone on Thursday.
What interest-rate cuts from the Fed and PBOC mean for emerging markets
China has increasingly been left out of actively managed emerging-market ETFs this year, with funds that exclude Chinese assets outpacing broader emerging-market ETFs and China-focused ETFs, according to FactSet data.
But China's economic recovery, along with the Federal Reserve's monetary-easing cycle and an accompanying soft landing for the U.S. economy, are crucial for emerging-market stocks, said analysts. The Fed last week delivered its first interest-rate cut in four years, which gives more room for emerging-market central banks like the PBOC to implement a relatively loose monetary policy without having to fear a sharp decline in their domestic currencies, said Ladner.
"Stock valuations in the emerging markets are baking in too much pessimism about the global economy. ... We get Fed easing with a soft landing, and the dollar DXY is weakening, which is a perfect storm for emerging markets' outperformance," Wool told MarketWatch in a phone interview on Thursday.
As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.
The good...
... and the bad
