TOKYO -- Investors are gravitating toward stocks in emerging economies outside the sagging Chinese market, buying into India and elsewhere on high growth expectations as well as a recent break in the dollar's strength.
The MSCI Emerging Markets ex China Index closed at 5,841 on Thursday, up 8% from the end of October and just slightly off its year-to-date high from August.
This rise has been driven in large part by India, which has one of the highest weightings in the dollar-denominated index. India's benchmark Sensex index ended Friday at a record high of 69,825, with the total market capitalization of its constituents topping $4 trillion for the first time after growing around 20% so far this year, according to QUICK-FactSet data.
Investors are betting on a rise in domestic demand as India's population grows. The country is also increasingly becoming a manufacturing hub as companies work to make their supply chains less reliant on China.
Yasutomo Mentani of asset manager Eastspring Investments visited India for the first time in five years this week. "There was a big shopping center in central Mumbai, and more sport utility vehicles were driving around as a result of luxury spending," Mentani observed.
India's Federation of Automobile Dealers Associations reported record retail sales of passenger vehicles last month. Shares of Maruti Suzuki and Mahindra & Mahindra have each gained around 30% this year, while construction company Larsen & Toubro jumped 60%.
Indian stocks appear unfazed by the U.S. arrest of an Indian national last month over an alleged plot to kill a Sikh activist at an Indian official's direction.
"It was stopped before anything happened," said Makoto Izawa, a senior strategist at the Tokai Tokyo Research Institute. "The U.S. is trying to incorporate India into its supply chain relocation amid its conflict with China, and I don't think that trend will be interrupted."
Goldman Sachs in November raised its rating on Indian stocks to overweight, citing expectations for broad-based growth that is relatively insulated from the macroeconomic environment. Nomura Securities has also rated India as overweight, due to profit growth and high liquidity.
Investors are homing in on other emerging markets as well.
A total of $3.2 billion has flowed into Taiwan since October, more than the $3 billion inflow to India, according to EPFR Global. Hopes of a semiconductor rebound have helped buoy the tech-heavy TWSE Capitalization Weighted Stock Index to its highest levels this year. South Korea's KOSPI index is also up around 10% from the end of 2022.
Contributing to the trend is a halt in the dollar's upward march, as traders start pricing in speculation about rate cuts by the Federal Reserve amid signs of a softening job market. The Korean won and the New Taiwan dollar have strengthened 3% against the greenback since the end of October. Stronger currencies lighten the burden of interest on dollar-denominated debt.
Some countries that had moved to raise rates before industrialized economies are now starting to cut them as inflation calms down.
"As downward pressure on their currencies eases, countries like Brazil that have started lowering rates will have more room for cuts," said Shinya Harui, a foreign exchange strategist at Nomura Securities.
The thinking among investors is that lower interest rates support the economy, in turn boosting corporate profits.
Poland, which slashed rates by 1 percentage point in September and again in October, has seen a roughly 20% gain in the benchmark WIG20 index since the end of September. Brazil's Bovespa Index gained 8% over the same period amid rate cuts that started in August.
In China, meanwhile, stocks are down as the real estate slump fuels worry about the economy. The Shanghai Composite Index is languishing below 3,000, and Hong Kong's Hang Seng Index set a year-to-date low Tuesday. Since October, $1.1 billion has flowed out of Chinese funds, according to EPFR, freeing up funds to go to other emerging markets.
Long-term interest rates in the U.S. will likely continue to sway share prices elsewhere.
"If the American economy ends up with a soft landing, and rate cuts start later than expected, rates could stay elevated, which would be a headwind for emerging-market stocks," said Toru Nishihama, chief economist at the Dai-ichi Life Research Institute.
---
For all our coverage on wealth management, visit our Wealth Management page.
