Will Uncertain China GDP Targets Affect Emerging Market ETFs?

Since the Great Recession that stemmed from the 2008 financial crisis, China and India have contributed to much of the world’s economic growth.

Now, activity in both countries has plunged, raising the risk of a prolonged global slump, as China said Friday that it could not establish a target for economic growth this year based on the widespread uncertainty the coronavirus pandemic has caused to the world’s second largest economy.

“I would like to emphasize that we have not set a specific target for economic growth this year,” said Chinese Premier Li Keqiang in his annual policy address at the National People’s Congress session on Friday in Beijing.

“It is because our country will face certain factors that are difficult to predict in its development due to the great uncertainty regarding the Covid-19 pandemic and the global economic and business environment.”

China has been setting growth targets for decades, making this development particularly unsettling. Last year, the country projected growth between 6% and 6.5%. GDP grew 6.1%, within range, but its slowest pace in nearly 30 years.

In the same address, the Chinese premier also promised to put in place “enforcement mechanisms” on Hong Kong and Macau to prevent acts that endanger national security.

“We will fully and faithfully implement the policy of “One Country, Two Systems,” under which the people of Hong Kong govern Hong Kong and the people of Macao govern Macao, with a high degree of autonomy for both regions,” Li Kequiang said.

Hong Kong’s Hang Seng Index lost nearly 6% on Friday amid the news.

Meanwhile, Shaktikanta Das, the governor of the Reserve Bank of India, noted Friday that the country’s economy would languish in the current fiscal year, which ends in the Spring of 2021. India’s economy has not contracted over the course of a year since 1979.

These developments are especially noteworthy for ETF investors involved in emerging market ETFs like the iShares MSCI Emerging Markets ETF (EEM), which seeks to track the investment results of an index composed of large- and mid-capitalization emerging market equities, and has heavy holdings in China. EEM is down over 2% Friday.

“Emerging market currencies have been among the biggest market casualties of the Covid-19 outbreak as their generally weaker home economies have seen cash flow out as investor risk-aversion rises. However, while their fortunes have differed, it’s very difficult to see them thriving in aftermath which promises plenty of headwinds,” Daily FX analyst David Cottle noted. “The Mexican Peso will serve as a pretty good exemplar of the process so far. It has understandably fallen sharply against anti-risk plays such as the US Dollar as the crisis has developed and shows little sign of clawing back much-lost ground.”

“In all honesty, the timing could not be worse by China, facing increasing calls for a more open investigation into the origins of COVID-19, and criticisms about leading Belt and Road borrowers into debt traps,” Jeffrey Halley, an Asia Pacific market analyst at OANDA, said in a note.

Still, for investors looking to take advantage of a weakness in developed markets, there are choices such as the Direxion MSCI Developed Over Emerging Markets ETF  (NYSEArca: RWDE). RWDE provides a means to not only see developed markets perform well, but a way to access a convergence/catch-up in performance of DM relative to EM, a spread that has clearly widened over the past 6 months. The fund seeks investment results, before fees and expenses, that track the MSCI EAFE IMI – Emerging Markets IMI 150/50 Return Spread Index.

For more market trends, visit  ETF Trends.

Will Uncertain China GDP Targets Affect Emerging Market ETFs?

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