Investors fretting over the recent drop in emerging-market stock indexes may find comfort by drilling down into the details.
Since June 18 — the evening U.S. President Donald Trump seemed poised to escalate the trade war by pledging tariffs on an additional $200 billion in Chinese exports — through Tuesday, the MSCI Emerging Market Index dropped 3.5 percent. On the surface, that suggests broad pain for a massive asset class whose geographic reach spans from Mexico to Indonesia.
In reality, the underperformance has been much more concentrated in Chinese equities: The MSCI Emerging Market Index ex-China has actually beat the S&P 500 Index over this span amid gains in Peruvian, Brazilian and Turkish stocks.
The index’s sharp drop reveals the power Chinese technology stocks wield in major equity benchmarks. Companies based in China and Hong Kong make up one-third of the MSCI Emerging Markets Index and seven of its top 10 constituents by size. The BAT trio of Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. account for more than 1/10th of the index. A China technology-focused ETF has lost more than 7 percent over this stretch.
Turning to fixed income reaffirms an emerging-market selloff with Chinese roots. The iShares JPMorgan USD Emerging Markets Bond exchange-traded fund (which has just a 4 percent weighting toward China) and the VanEck Vectors JPMorgan EM Local Currency Bond ETF (which lacks any exposure to China) have both delivered positive returns since trade wars flared up, in contrast to similar products for U.S. investment grade and high yield.
Shanghai Composite (monthly) rolling over hard. Buyer beware. EM crisis could soon rollover to DM.