EM Stocks Doing Better, Except for Drag From China, Ned Davis Says

Other emerging market nations, such as Taiwan and India, are compensating for weakness in the Chinese market.


China used to dominate the MSCI Emerging Market Index, with a 40% weight as of 2020. Today? Its share has shrunk to 25%, still the leader, but nearer to the levels captured by other EM powerhouses, such as Taiwan (19.4%) and India (19.2%).

It turns out that those other EM nations have enjoyed big economic and market increases that have compensated for the woes in China. The Shanghai Composite is up a mere 0.25% this year, while Turkey’s exchange has risen 49%, Taiwan’s 27.5%, India’s 11.6% and South Korea’s 5.3%. The overall MSCI EM index is up 7.5% this year through Thursday.

For 2024 through June 30, emerging markets climbed 20% without counting Chinese stocks, but 9.8% with China included, MSCI found. Over the past five years, the China-excluded index beat the full roster by almost two percentage points yearly. Five countries constitute 80% of the EM index’s weight: China, India, Taiwan, South Korea and Brazil.

“China has not participated” in the EM surge, said Tim Hayes, chief global economist at Ned David Research, in an interview about his report on the subject. To be sure, the EM index’s 2024 performance lags behind that of the S&P 500, which is up 16.2% as of Thursday’s close.

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The problem with China is its continuing post-pandemic economic funk, reflected in its equity market. Troubles in its overbuilt property sector, which triggered a debt crisis, and low domestic confidence dog its equities’ returns. Chinese stocks have lost more than $4 billion in value since 2021. So, more broadly, as of the 15 years ending June 30, the EM index rose 9.8% annually, but excluding China, it was ahead 20%, MSCI noted.

How times have changed. In the previous decade, China’s high growth juiced its stocks and was the propellant for the EM index. In 2019, for instance, the index rose 18.4%, but if China were excluded, results were two percentage points lower.

U.S. pension funds and endowments have energetically invested in China for years, a study by the Future Union, an advocacy organization, pointed out. It found that public pension funds in 43 U.S. states held investments in China and Hong Kong, as of mid-2023. Over the previous 36 months from summer 2023, for instance, the California Public Employees’ Retirement System made 80 EM investments, worth an total of $7.86 billion.

Things may be changing, though. The Teacher Retirement System of Texas recently decided to reduce its EM allocation to 1% of its assets from 9% and to remove China from its benchmark. The fund indicated it feels developed markets will do better than emerging ones in the future.

Nonetheless, in mid-July, the NDR report stated, MSCI emerging market indexes “have accounted for eight of the top nine performers over the past 21 days, all outperforming the U.S.” and the MSCI All Country World Index. Chinese stocks were down 4% over the same period, the report noted.

Thus, the emerging markets have shown greater breadth, with the exception of laggard China, the report observed. The 24 EM components of the ACWI, it said, are “above its 50-day moving average and ha[ve] been reaching record highs, with 8% of the markets at one-year highs and none reaching new lows.”

According to the Ned Davis report, declining interest rates globally should fuel EMs, which need to borrow a lot. The bellwether 10-year Treasury’s yield is down half a percentage point since its yearly high in April, when inflation fears still prevailed. The outlook on inflation now is for a continued cooling.

Meanwhile, several EM central banks have cut interest rates over the past year, with more expected soon, per S&P Global. Eight of them have cut over the past year, Ned Davis wrote. China, though, has not reduced its rate (3.5%) since 2015. Many other EMs are below China’s level. Taiwan, for example, is at 3.1% and is anticipated to reduce that further soon.

Ned Davis’ model, its report indicated, “currently calls for maintaining the overweight exposure” to the MSCI EM index, with a caveat: “It’s advisable to exclude China from that exposure.”

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NYC Pension Adopts ‘First in Nation’ Guidelines for Private Real Estate Investments

The Responsible Property Management Standards are intended to increase the quality and sustainability of residential real estate investments across seven core principles.



New York City Comptroller Brad Lander on Wednesday outlined new standards for private real estate investments within the portfolio of the New York City Employees’ Retirement System, which has adopted the standards into its investment policy. The standards have been proposed for the city’s other four pension systems.
 

Known as the Responsible Property Management Standards, the guidelines aim to improve the long-term quality and sustainability of residential real estate investments in properties owned by or funded by investment managers and aim to reduce housing instability and encourage fair practices for residents living in these properties.  

The standards were developed by the Office of the New York City Comptroller, which manages the investments of New York City pension funds, as well as For the Long Term, a nonprofit organization which advises treasurers, comptrollers, controllers and auditors at pension funds across the country. 

Combined, the five New York City pension systems manage $16.62 billion in private real estate assets, comprising 6.15% of the $270.46 billion in assets under management across the systems, as of May 31. 

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The systems include the New York City Employees’ Retirement System, the Teachers’ Retirement System of the City of New York, the New York City Police Pension Fund, the New York City Fire Pension Fund and the New York City Board of Education Retirement System.  

NYCERS manages $5.81 billion in private real estate assets, roughly 6.82% of the fund’s $85.3 billion portfolio.  

Standards  

The standards were developed in response to the growing institutional ownership of rental housing. The comptroller’s office noted that institutions acquired 200,000 single family homes between 2011 and 2017, across $36 billion in investments.  

“For institutional investors purchasing these homes who are interested in the long-term sustainability of the market, there is a clear lack of guidance on property management,” state the Responsible Property Management Standards. “Implementing a uniform set of standards for quality property management is critical to protecting the long-term profitability of investments.”  

According to a spokesperson for the comptroller’s office, the standards apply to prospective and new investments; preexisting investments would not be subject to the standards

The Responsible Property Management Standards comprise seven core principles, which each have one or more standard practices. The seven principles are: 

  • Implement consistent and fair tenant screening and selection practices; 
  • Offer clear and fair leases and reduce undue burdens of security deposits; 
  • Maintain safe, quality, accessible housing; 
  • Foster positive tenant-landlord relations; 
  • Honor tenants’ rights to free speech and free association; 
  • Optimize tenant stability; and 
  • Minimize evictions and other negative exits. 

Among other guidance, the standards require one to 30 days’ notice for rent increases, which would be limited to no more than the 12-month change in the Consumer Price Index, plus 5%. In total, there are 26 standards which the NYC Comptroller’s office would expect its asset managers to follow

If the standards are widely approved by the city’s pension funds, asset managers would be asked to adopt the standards in their real estate investment policies.  

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