As one of the largest economies and markets in the world, when China catches a so-called “economic cold,” the impact reverberates throughout the global economy. Since May 7, 2014, China’s equities 1 have rallied strongly, buoyed by improving economic data. It is hard to imagine emerging markets having a sustained uptrend without China’s participation, so we find this upturn encouraging for emerging market assets.
In this piece, we show which of WisdomTree’s broadly diversified emerging markets Indexes have been most effective at capturing this inflection point in China’s equities. Additionally, we look to isolate China’s Financials, specifically by looking at the performance of the WisdomTree China Dividend ex-Financials Index (China ex-Financials) and the MSCI China Financials Index, since they’re often mentioned as central to China’s economic narrative.
Two Indexes: Similar Aggregate Exposure, Very Different Companies
Of WisdomTree’s broad emerging market equity Indexes, only the WisdomTree Emerging Markets Equity Income (17.55%) & Consumer Growth (18.17%) Indexes had double-digit exposures to China as of July 25, 2014. For context, the two most widely followed market capitalization-weighted indexes of emerging market equities had 18.5% and 20.5% of their weight in China.2
The single most important differentiating factor is that Equity Income, as a “valuation hunter” in emerging markets, has zeroed in on large Chinese banks, which are some of the least-expensive large payers of cash dividends. By virtue of Consumer Growth’s methodology, these same firms are not eligible for inclusion; they are considered to be less related to the growth of Chinese domestic consumption.
How Did the Different China Exposures Perform in 2014?
• China Exposures of Both Indexes Outperform during the Rally: In the chart, we include the performance of the MSCI China Index as a reference point for how China’s equity markets overall did during the rally. Both Consumer Growth and Equity Income outperformed the MSCI China Index, and this tells us that China’s recent rally has been broad in nature and not confined to the large banks—even though the performance of the MSCI China Financials Index shows that they clearly participated.