Morgan Stanley's Garner Sees China Outperforming EM

TL;DR

China continues to outperform emerging markets with lower volatility.

Transcript

you overweighted China already in November let's take a look at their performance on a long-term basis here on my Bloomberg I can see that China is still outperforming its Emerging Markets uh the msci emerging markets that would be the line in Blue China the line in white so you're making a call for China when it comes longterm what about the volat... Read More

Key Insights

• China's stock market has consistently outperformed other emerging markets over the past 5, 10, and 15 years, driven by superior return on equity and earnings growth.
• Despite its historical outperformance, global emerging markets funds have been underweight in China, reflecting skepticism about the sustainability of China's growth model.
• China's economy has recently stabilized, exiting a period of deflation, which supports the continued outperformance of its market with potentially lower volatility.
• Key sectors driving China's market growth include consumer, healthcare, financials, and cyclicals, with a focus on high revenue growth and less leverage.
• Mainland Chinese markets have shown less volatility recently compared to other emerging markets, although they have been historically volatile.
• The H shares in Hong Kong, part of the MSCI China universe, are technically overbought but remain part of the bullish outlook for China's market.
• The domestic Chinese investor is shifting from bonds and property to stocks, contributing to a bull market both onshore and offshore.
• Global economic activity is improving, and the dollar's stability is supporting a bullish environment for emerging markets, including China.

Questions & Answers

Q: Why is China expected to continue outperforming other emerging markets?

China is expected to continue outperforming other emerging markets due to its superior return on equity and earnings growth over the cycle. The Chinese economy has stabilized, exiting a period of deflation, which supports continued market outperformance with potentially lower volatility compared to other emerging markets.

Q: What sectors are driving China's market growth?

China's market growth is driven by key sectors such as consumer, healthcare, financials, and cyclicals. These sectors are characterized by high revenue growth and less leverage, making them attractive for investors. The focus is on sectors with higher return on equity and potential for sustained growth.

Q: Why are global emerging markets funds underweight in China?

Global emerging markets funds have been underweight in China due to skepticism about the sustainability of China's growth model. Concerns over bank credit and non-performing loan situations have contributed to this underweight position, despite China's historical outperformance over the past 5, 10, and 15 years.

Q: What is the significance of the domestic Chinese investor in the market?

The domestic Chinese investor plays a significant role in the market by shifting investments from bonds and property to stocks. This rotation is contributing to the development of a bull market both onshore and offshore. High net worth individuals and insurance companies are also taking advantage of investment opportunities through the southbound connect program into Hong Kong.

Q: How have Mainland Chinese markets performed recently in terms of volatility?

Mainland Chinese markets have shown less volatility recently compared to other emerging markets. Although historically volatile, particularly in 2015, the recent stabilization of the Chinese economy and market conditions has led to reduced volatility, supporting a more favorable investment environment.

Q: What is the current technical status of H shares in Hong Kong?

H shares in Hong Kong, which are part of the MSCI China universe, are currently technically overbought. Despite this, they remain part of the overall bullish outlook for China's market. The technical overbought status is a result of strong demand and market performance, reflecting positive investor sentiment.

Q: How is global economic activity impacting emerging markets?

Global economic activity is improving, which, along with the dollar's stability, is creating a bullish environment for emerging markets, including China. The positive economic surprises and stable currency conditions are encouraging investment flows into emerging markets, supporting their growth and market performance.

Q: What role does the dollar's stability play in emerging markets?

The dollar's stability plays a crucial role in emerging markets by providing a more predictable and stable investment environment. A stable dollar reduces currency risk and supports capital flows into emerging markets, including China, contributing to their growth and market performance. This stability is part of the broader bullish outlook for these markets.

Summary & Key Takeaways

• China's stock market is outperforming other emerging markets due to superior return on equity and earnings growth, despite global funds being underweight in China. The economy has stabilized, supporting continued outperformance with lower volatility.

• Key growth sectors in China include consumer, healthcare, financials, and cyclicals, focusing on high revenue growth and less leverage. The market is supported by domestic investors shifting from bonds and property to stocks.

• The H shares in Hong Kong are technically overbought but remain part of the bullish outlook. Global economic improvements and dollar stability contribute to a positive environment for emerging markets, including China.