Robert Halver Column: Emerging Market Stocks Long Ripe for Portfolio, But Preferably Without China
Countries like India are shamelessly exploiting the fact that things are simply not going well in China anymore. Massive crises in real estate or demographics, coupled with the Communist Party's control mania, are strangling the former engine of global growth. Things are much better elsewhere. That's why emerging market stocks have long been ripe for the portfolio. Simply without China.
The simple and beautiful days of childhood in China are over. Geopolitically and economically, the country has reached adolescence, where many things – parents know this – are becoming more difficult. And the Beijing Communist Party obviously finds it difficult to take effective countermeasures. In fact, the (financial) world views China more critically at all levels. This benefits other emerging countries.
The country of smiles has lost laughter.
Huge housing crises, an aging population and deflation are undermining the self-confidence of a nation that has only known sunlight for about 30 years. China's planned economy is also an obstacle. But how can you plan for five years in a world that has become uncertain? For comparison: five years ago, in 2019, the world was still fine for us. The German economic model was fantastic, there was neither Corona nor the war in Ukraine: “what a difference five years make.”
About the expert
Robert Halver is head of capital market analysis at Baader Bank.
Furthermore, there is a control mania on the part of the Communist Party, which restricts the freedom of the market economy like sardines in a can and therefore leaves a lot of economic potential “on the left.” And the celebrated friendship between Beijing and Moscow can result in cheap supplies of raw materials. However, this has cost China greater sympathy in the West, which is already reflected in massive capital withdrawals to reduce dependencies. It is no longer a law of nature that China is the only job bank in the world.
Last but not least, even Confucius couldn't figure out what exactly is going on in China beyond embellished data. This does not guarantee confidence, even in the Chinese stock market.
Emerging markets are not China's stakeholders
In general, the other emerging countries are not loyal brothers or supporters of Beijing. They publicly criticize the imperialist United States and the use of the US dollar as the world's reserve currency.
However, emerging markets do not want to exchange the US knout for the Chinese one, which would emerge with the renminbi as an alternative global reserve currency. Furthermore, they do not want to affect the purchasing power of the West. And if the yuan really does become the anchor of a new global reserve currency, China would have to open its financial and currency markets as it did at the open house. Then the renminbi soared and Chinese exports plummeted.
China is not sinking, but…
With immense economic stimulus programs and a relaxed bailout policy by the Chinese central bank, economic stabilization will begin at least in the second half of the year. And instead of the previously dominant domestic economy (real estate, global production facilities), China will increasingly rely on technology and innovation and attack classical industrialized countries in their flagship sectors, for example Germany in the automobile sector.
But foreign trade is not an obstacle-free solution either. There is the threat of new tariffs and sanctions, which the United States would definitely increase under Trump. And also in Europe the protectionist voices are now unmistakable.
“New kids on the emerging markets block“
India is shamelessly exploiting geopolitical skepticism towards China, differences between Washington and Beijing, and its current economic and ideological hurdle to present itself as an alternative. The country cannot be assumed to love America. But there is nothing wrong with a platonic and financially successful relationship.
With demographic developments and extensive reforms, India is attracting more and more attention from the (industrial) world. In fact, the country attracts countless foreign companies and skilled workers. A victory for President Modi's current ruling party in the upcoming spring parliamentary elections is considered likely and will continue India's growth path. According to the International Monetary Fund, the Indian economy will grow 6.5 percent in 2024, clearly stronger than China's and more than twice as fast as the world economy.
This also benefits financial markets, whose increasing attractiveness is the government's stated goal. Promising Indian sectors include consumer discretionary, technology and financials. Above all, the combination of technology and banking makes India attractive to institutional investors, who are increasingly gaining weight in stock market indices.
Taiwan is also an attractive market. Taiwan is being used as a driving force for new waves of technology, particularly in the semiconductor industry. By the way, an invasion doesn't make much sense to the Chinese. They would lose access to high-performance semiconductors. Last but not least, they would become a pariah state, leading to international sanctions. In any case, the Western world does not recognize Taiwan as an independent state. So why attack Taiwan unnecessarily?
In South America, countries like Mexico and Brazil are receiving more and more attention. Its stock markets are benefiting from the progressive shift of American supply chains from China to its immediate neighborhood, followed by private investment. Overall, stock markets in other emerging countries are outperforming China. The classic clan approach, according to which everyone is blamed for individual crises, has long since collapsed.
Without a significantly larger market economy, significantly less government control, and an open information policy, it will be difficult for China to keep up in the future. Simply curing the symptoms and not the causes does not bring lasting success. Even state-mandated support purchases from capital-raising agencies, the so-called “National Team” – called in the United States the “Dive Protection Team” – only guarantee short-term stabilization in the stock market. Basically, emerging markets are increasingly attractive and have long been ripe for investment.
And Europe and Germany?
Compared to emerging countries, the old continent seems to say goodbye to growth. State ideological and economic paternalism, with a lot of bureaucratic sand in the making, is depriving Germany of more and more competitiveness.
So we will not achieve a green economic miracle. “Miracles always happen” is what a hit song says. Unfortunately, this does not happen in economic reality. If we do not soon learn a lot from emerging countries, our rise and prosperity will be like in the Eurovision Song Contest: “Germany – zero points.”
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