(Bloomberg) — Emerging-market equities will be boosted by stimulus measures in China thanks to the country’s large weightings in indices and close economic ties with other developing countries, according to veteran investor Mark Mobius and Goldman Sachs strategists.
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China accounts for one quarter of the benchmark MSCI EM equity index and it means when China markets rally, the index also moves up. Stimulus measures, coupled with a Federal Reserve interest-rate cut, helped emerging-market equities jump 10% from mid-September lows.
China’s easing has broadened the emerging-market equity rally and it has been powered by outsized gains in heavy-weight Chinese equities, Goldman strategists including Kamakshya Trivedi wrote in an emailed note. These have risen nearly 40% from their lows, with China’s outperformance against the rest of the emerging markets in the past three weeks at its widest in the past 25 years.
They said they expect further upside in emerging-market equities, with spillovers from China’s growth in several countries such as South Korea, Malaysia and South Africa.
Goldman Sachs has raised China to overweight from the market weight in its Asia strategies.
Emerging-market stocks funds had their highest weekly inflows with $41 billion through Oct. 9, Bank of America said, citing EPFR Global data. China equities had record inflows of $39.1 billion in the week.
Mobius, chairman of Mobius Emerging Opportunities Fund, said he believes the Chinese authorities will try to stimulate the market more because they want foreign capital to return. “The Chinese want to see the market going much better than it has been going even now,” he said in an interview on Bloomberg TV. “Of course there will be corrections along the way.”
Fund Allocation
Mobius said around half of emerging-market investors could be tracking the index, which means they must allocate additional funds to China due to its large weighting.
“It’s going to be an accelerating development, with more and more people filing in,” he said. With India, which has the second largest weighting in the EM index, emerging-market equities will have better prospects of outperformance against US stocks.
Up to now, many investors were against China but now that is changing, Mobius said.
“They did not want to hear anything about China because they were hurt so badly” he said. “Now that’s changing. As the money comes in, the total pool of money coming into emerging markets will expand. You will see this whole market move.”
–With assistance from Colleen Goko.
(Updates with weekly flows data in the 6th paragraph)
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