China’s stock market (based on the MSCI China Index, which includes local Chinese listings and listings in Hong Kong) has lagged badly, whether compared to rest of the Emerging Market universe or to the developed market universe. The underperformance began in early 2021 and mostly continued since then, with a short rebound earlier this year that has since been reversed.
And the underperformance relative to developed markets (based on the MSCI World index) in US dollar terms (reflected in the US-listed ETFs that track the indices) has been quite dramatic. Since the interim peak in relative performance in mid-February 2021, the MSCI China ETF (MCHI) has returned -49%, while the MSCI World Index (ticker URTH) has returned -4%, a 45% underperformance in about 18 months.
As emerging market (EM) equities continue to lag those of developed markets (DM), a question we sometimes get is “why have the stock markets for ‘higher growth’ emerging markets lagged developed markets so much in the last decade?”. A key reason is that higher GDP growth has not translated into corresponding corporate earnings growth for emerging markets.
In our regional allocation work, we have been underweight in Emerging Markets relative to developed markets since May, and remain so currently. A key reason for our continued underweight stance is that the relative fundamental momentum for emerging markets remains very weak compared to that of the broader global equity market.
The chart below shows one of our popular composite indicator charts based on the relative performance of the widely-followed MSCI Emerging Markets ETF, ticker EEM, versus the broad global benchmark of the MSCI All-Country World Index (ACWI) ETF, represented by ticker ACWI.