There are only a few places for investors to hide in this downturn with both developed and emerging market equities ended in the red for the month of June. MSCI Emerging Market Index was down 6.6% for the month, slightly ahead of MSCI World which was down 8.6% for the month. The Fed increased rates by 75 basis points (bp) in June- this is the first 75bp rate hike since 1994- which was priced into the market a few days before announcement. The main drivers of global risk have been inflation, lockdown in China, geopolitical tensions, food and energy shortages and growing recession fears. The next few months will be important as they may determine if inflation has peaked and if that’s the case, we may see repricing of interest rates in the bond market.
China was the standout for the month following relaxed restrictions. The best performers for the month were Prosus which was up 26%, Ishares China etf (+8.4%) and Pan Pacific International (+4.1%). Prosus announced a share buyback program to close the discount to its NAV. This will be done through gradually selling down their stake in Tencent and using the proceeds to buy back their shares and focus on simplicity. Prosus’s share price movement is correlated to their 29 percent stake in Tencent as well as their financial results. So, this is good news is welcomed by the market as the share exchange with Naspers did not close the discount the market was expecting but only added more complexity to the structure.
MSCI China Index was up 6.7% for the month as the Chinese government eased lockdown restrictions. The Chinese government reopened the economy on 1 June 2022, following 60 days of lockdown after Covid-19 cases dropped from 26 000 cases per day in April to only 29 cases by end of May. The ‘Zero-Covid’ policy, which contributed towards the policy uncertainty in China, hasn’t ended; and has caused companies to halt investments in the country until there’s better clarity. Despite the current challenges in China such as regulatory reforms and US/China conflict, there’s still long-term trends in the country that will provide opportunities for the equities market. There will be winners and losers in the new the future with all the changes that are happening in China, we believe that local Chinese companies could come out at the top while Chinese companies whose exposure is more offshore will be negatively impacted. China’s stock and bond markets are the second largest in the world, followed by the U.S., so it shouldn’t be ignored in one’s portfolio; they file the most patents globally and they spend more on R&D relative to other countries globally. The People’s Bank of China is one of the few central banks in the world that’s still easing the cycle of monetary policy, as they are trying to recover from the lockdown impacts. Furthermore, their valuation has come off; with PE ratio falling from 24.5x beginning of 2021 and is now currently at 11.4x.
Timing the market is a difficult task to perform but one needs to look for potential signs which could trigger a recovery such as easing of inflation or Covid-19 lockdown relaxations. Historically, recoveries happen so quickly that they can pass one by if you’re not already invested. Therefore, as an investor, one should try to stay calm and have a long-term focus.