China’s Easing Bodes Well for EMQQ | ETF Trends

While fears of increased regulation in China made 2021 a difficult year for emerging markets investors, some think that the current regulatory cycle in China is slowing, which would allow technology companies to digest and adopt to a series of new norms.

This year is predicted to be a year of easing in China. Not only are regulatory pressures expected to abate from elevated levels, but China is also expected to launch more accommodative monetary policy to help stimulate the economy.

According to a recent report from UBS on emerging markets, “China’s weight and relevance to emerging markets continue to grow, and its policymakers are bucking the trend in the rest of the world by delivering monetary and fiscal policy easing this year.”

In fact, on Tuesday, Chinese state-backed funds intervened in the stock market. And on Wednesday, the benchmark CSI 300 Index closed 0.9% higher after suffering its biggest intraday drop since August, 2021.

Sebastien Galy, a senior macro strategist at Nordea Investment, is quoted in Bloomberg as saying that the “state-backed intervention to buy stocks makes sense, it is a well-targeted form of easing,” adding that China tech has reached “interesting valuations” and the intervention could form a temporary bottom for the market.

This is in stark contrast with the U.S., where rates are expected to rise because of higher inflation.

This combination of regulatory and monetary easing could be good news for exchange traded funds that invest in emerging markets, such as the Emerging Markets Internet Ecommerce ETF (EMQQ). Though not a dedicated China ETF, over half of EMQQ’s weight is allocated to Chinese equities, including those hit hard from the regulatory crackdown.

Akeem Bailey, director of research at EMQQ, wrote in a monthly outlook paper: “While China aggressively played catch up on the regulatory front in 2021, the shock factor should dissipate as the country’s tech giants adjust. This is exemplified by a recent meeting between China’s top regulators and 27 Chinese companies, which stressed the importance of ‘promoting the healthy and sustainable development of internet companies.’”

In terms of valuations, Bailey notes that the fundamentals remain solid, saying that “the gap between EM and developed market valuations is wider now than at any point since 2006.”

Added Bailey: “As we turn the page to 2022, the PEG ratio of the EMQQ Index is still less than half that of the Nasdaq 100 Index. Sentiment should get an added boost as brokerages continue to upgrade their earnings per share estimates for 2022. Lower valuations and earning upgrades should help set the tone for the rest of 2022.”

According to the report from UBS: “Valuations are relatively undemanding. By and large, emerging market equities, bonds, and currencies offer competitive valuations relative to their own history, and significantly so relative to US and other developed market assets.”

For more news, information, and strategy, visit our Emerging Markets Channel.