Brief summary
- EM (down 7%) trails DM (up 2%) as the regulatory hammer in China (35% of EM) slams down on its Tech sector (down 18%)
- Covid lockdown in un-vaccinated Asia, eg Philippines (down 12%) and Vietnam (down 7%), riots in South Africa (down 1%)
- Silver linings: US yields still low, OPEC patched up, remittance growth, food inflation softens, Chile rejects communism
Un-vaccinated Asia succumbs to Covid
Concerns over the Delta Covid variant, very limited vaccination in EM, and the reimposition of lockdowns drove concern over much of Asia, eg Vietnam (down 7%) where industrial production has suffered, or Thailand (down 7%) and Philippines (down 12%), both of which are more dependent on Tourism.
The economic damage from Covid is undeniable and this partly offsets the pressure to withdraw policy stimulus. That was a universal experience in 2020.
The challenge for countries in EM this year and next will be how to balance infection control, re-opening, policy normalisation (without triggering capital outflows) when some of the larger markets in DM, particularly the US, recover sooner. Faster vaccination would make this an easier task, but this is precisely where much of EM is lagging well behind.
Tech: China Tech bends the knee, causes panic
China has a political model, centred around a president and a one-party state, wielding concentrated power in a highly heterogenous, fragmented, unequal, and massive country, where that president and party survive only if they are pre-eminent.
China is therefore prepared to nakedly subjugate its private sector corporates for the “public good”, as defined by the president and the party. Its actions in the Tech sector are a testimony to this.
That political model is not new but the consensus active emerging market equity investor has now received a stark reminder (not to mention the blind passive investor, who has learned to ignore that fact, as Chinese corporates – particularly its Tech companies – grew to such an extent that they did not take centre stage so much as almost upstage the emerging market equity index).
Hence, there is currently a sense of panic over the outlook for China Tech equities, the leading sector in the largest country weight in emerging markets (c35% of MSCI EM).
In turn, there is concern over where the rights of independent providers of capital across debt and equity, particularly foreign ones, and across all sectors, rank in the hierarchy of "public good" as defined by the Chinese leadership.
But China has not killed capitalism. It still needs private capital and investors in publicly traded securities. Indeed, it needs these Tech companies to continue growing, albeit within the red lines it now draws.
Regulatory interference, or lack thereof, according to the competence and whims of government, and the electorate or vested interests that they serve, are a feature of all capitalist economies. There is no such thing as naked capitalism, or a totally, unfettered free market anywhere globally, apart from, perhaps, the undocumented economy.
What makes Chinese capitalism so different is the speed with which the government can so comprehensively change regulatory policy without any change in the government itself. In democratic capitalist economies, there are usually leading indicators for policy pivots in public debates and elections. In autocratic regimes, there are clues sometimes around succession for key jobs in the policy elite. But in China, the information of this sort that investors have to work with is scarce.
In pockets, China Tech looks relatively attractively valued compared to US Tech, particularly as regulatory scrutiny in the US intensifies, and is not necessarily laden with more long-term investment risk than other parts of the EM equity universe, such as Korea-Taiwan Tech Hardware, India, Commodity exporters (Brazil, Russia, Saudi and South Africa in large EM), and small EM-Frontier.
China Tech co-opted
China's regulatory actions on its Tech sector are a result of the long-term threat to the control enjoyed by President Xi Jinping and the Communist Party in all policy spheres.
Preserving the dominant position of both President Xi Jinping and the Chinese Communist Party, executing the economic transition from exports and state-led infrastructure investment to domestic consumption, and, even, prosecuting parts of foreign policy require co-opting the tools and data of Big Tech and the loyalty of its quasi-celebrity founders.
'Super apps' such as Alibaba offer single portals to a wide range of digital services such as chat, payments, gaming and entertainment, banking (fintech), healthcare, transport, and e-commerce. Exerting control over these super apps allows the authorities, in turn, to control information and views (social control and surveillance), systemic financial risk, physical security risk (cyberwarfare), and, to a degree, implement foreign policy (via the soft power embedded in the international operations of these super apps).
These regulatory actions include the following:
Alibaba's Ant Group IPO shelved and an anti-trust fine.
Tencent anti-trust fine, the concession of exclusive music streaming rights, and the halt of new WeChat user additions while the platform's security protocols are upgraded.
Didi (ride-hailing) apps removal in China.
New data security law that authorised blocking overseas IPOs.
Meituan Dianping regulation of worker protection and minimum wages in online food delivery.
Conversion of much of the EdTech sector to non-profit.
Initiation of a six-month 'campaign' to combat excessive market power and data protection abuses across the Tech sector.
Tourism: Cheap but waiting for Covid to pass
For short periods, both Dubai and Iceland have demonstrated the ferocity with which Tourism can pick up when Covid-related travel restrictions are lifted.
While economic scarring is likely in economies where Tourism is a major contributor, equity valuations in some countries with over a 5% direct contribution from Tourism suggest the ultimate rebound is worth waiting for: Dubai, Egypt, Georgia, Jordan, Mauritius, Mexico, Philippines, and Sri Lanka.
Note that the indirect contribution, which includes the impact on related industries like food and beverage, retail, and entertainment, can be double the direct contribution.
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