Easing of Covid policies key in China

There have been some interesting developments in China. After months of market declines Chinese stocks have rallied since November as a relaxing of President Xi’s strict Zero Covid policies occured. The unprecedented protests in many parts of the country against the harsh lockdowns appear to have pushed Xi to offer greater freedoms. Importantly, word out of Beijing (as reported by AGF’s Greg Valliere) is that officials stated that infections are not as lethal as they have been, and that more vaccines among the elderly will help to suppress Covid.

European stocks remain hot

Europe has rallied sharply since October. There is a sense in Europe that borrowing costs will be coming down sooner rather than later; EU and UK investors are paying close attention to the Fed. Europe still has significant problems, particularly a horrible energy crisis.

Emerging markets: Opportunity for a cloudy 2023?

Brazil and our Latin America funds lagged in November as oil prices declined. West Texas Intermediate (WTI) dropped from $92.00 per barrel in early November to about $80.00 at month-end. Worries about higher interest rates and softer demand from China have been big factors. Prices dropping at the gas pumps are – again – normally good for the economy. Currently, however, it means more spendable cash for the consumer which is at odds with the wishes of the Fed.

Regarding emerging markets (EMs), broadly speaking many EMs are further ahead than developed markets in terms of monetary tightening and stock price corrections. The result: There’s less inflation, in general, among the EMs. For example, Brazil, Mexico, and other Latin American economies began raising rates well before the US and Europe. Brazil hit a high of 13.75% in October 2022. So, although inflation is still moderate in Asia and moderate to high in many EM economies, it is less than the US and trending down.

The emerging markets’ bear market is a little “long in the tooth” according to Blair’s Todd McClone. Prices and multiples have contracted, and the US dollar is likely to decline in 2023, providing a tailwind for EMs. They are ahead of the developed economies on the monetary tightening cycle. Emerging markets look like an opportunity for gain in a cloudy 2023.

World Markets: 2023 Returns

Index                                       January 2023

Brazil – Ibovespa                               3.4%

China – Shanghai Comp                     5.4

Europe – Euro STOXX 50                  9.7

India – S&P BSE SENSEX                 -2.1

Japan – Nikkei 225                             4.7

Mexico – Bolsa IPC                           12.6

U.S. – S&P 500                                  6.2

Indices do not include dividends.

By Brian W. Kelly, MoneyLetter Publisher