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Emerging markets: Chinese recovery, shifting rate expectations and commodities surge

Three things the Franklin Templeton emerging markets team are thinking about right now
  • China: Chinese equities have rebounded, reversing the negative returns recorded in the first quarter. Catalysts for the improvement in performance included positive developments in the real estate sector. A Chinese property developer announced agreement with its bond holders to restructure its overseas debt. In addition, Chinese authorities have been easing home purchase restrictions (these restrict buyers to purchases in their home province and/or limit the purchase of a second property) and lowering mortgage interest rate floor limits. No individual announcement is sufficient to turn the tide of negative sentiment; however, the emerging mosaic of positive news has contributed to a 7% gain in the MSCI China index in April, outpacing the gains in other global markets.
  • US interest-rate expectations: Investor expectations for US interest rate cuts have reset. In January 2024, the market consensus was for six rate cuts and a cumulative 1.5% reduction in the fed funds rate. By the end of April, this changed to expectations of 1.4 rate cuts and a cumulative 0.35% reduction in the fed funds rate. Faster-than-expected inflation and increasing probability of a ‘no-landing’ economic scenario in 2024 have contributed to the change. For emerging markets, this could imply a higher-for-longer US dollar outlook, which has negative implications for fund flows and companies with large foreign currency debts.
  • Commodity prices: The Commodities Research Bureau Index of commodity prices rose 7.4% year-to-date through the end of April. This reverses most of the 8% loss recorded in 2023. Rising energy and industrial metal prices, including copper, have contributed to the gains. Agricultural commodity prices are also rising following a wet spring planting season in Europe and drought conditions in Asia caused by El Niño. Higher commodity prices are also undermining the narrative of falling global inflation, which investors should closely monitor. Higher-than-expected inflation has implications for interest rates in developed countries and purchasing power in emerging countries.

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    30 May 2024

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