Emerging Markets Outperform on China Recovery & Commodity Rally
This year, emerging market (EM) assets have staged a notable rebound, with the MSCI Emerging Markets Index surging over 12% year-to-date as of late October—outpacing the MSCI Developed Markets Index by more than 5 percentage points. The rally is largely fueled by two interconnected tailwinds: China’s steady economic recovery and a sustained global commodity price upturn, which are creating a virtuous cycle for resource-rich and trade-dependent EM economies.
China’s post-pandemic recovery has emerged as a primary growth engine for EMs. As the world’s second-largest economy and top trading partner for over 120 countries, its rebound in consumption, manufacturing, and infrastructure investment is rippling across global supply chains. Southeast Asian nations like Vietnam and Malaysia have seen their exports to China jump by 15% and 12% respectively in the first three quarters, driven by strong demand for electronics components and agricultural goods. Thailand’s tourism sector, which relies heavily on Chinese visitors, has recovered to 80% of pre-pandemic levels, boosting hotel and airline stocks by 30% this year. Even Latin American economies such as Brazil and Argentina have benefited: China’s increased purchases of soybeans and iron ore have lifted their export revenues by double digits, easing fiscal pressures and strengthening local currencies.
Parallel to China’s recovery, a commodity rally has amplified EM gains. Global prices for industrial metals like copper and iron ore have risen by 18% and 12% year-to-date, supported by China’s infrastructure push and global decarbonization efforts. Oil prices have also stayed above $80 per barrel, buoyed by OPEC+ production cuts and growing demand from recovering economies. For resource-exporting EMs, this has translated into improved trade balances and corporate profitability. Chile, the world’s top copper exporter, has seen its trade surplus expand by 22% in 2023, while Saudi Arabia’s fiscal surplus is projected to reach 2.5% of GDP this year, up from a deficit in 2022. These improvements have attracted foreign capital: EM equity funds have recorded over $85 billion in net inflows this year, according to EPFR Global, with resource-focused sectors leading the way.
Complementing these factors, the Federal Reserve’s slower pace of interest rate hikes has weakened the U.S. dollar, reducing debt-servicing costs for EMs that borrow in greenbacks and making their assets more attractive to international investors. This has created a favorable environment for capital inflows, further boosting EM currencies and stock markets.
Of course, risks remain. China’s recovery could lose steam if property sector challenges persist, and a global economic slowdown might dampen commodity demand. Geopolitical tensions, such as ongoing conflicts in the Middle East, could also introduce volatility. However, the fundamental drivers of EM outperformance—China’s role as a global demand hub and the structural need for commodities in the energy transition—are likely to endure. For investors, EMs with strong trade links to China and abundant natural resources are poised to continue outperforming in the near to medium term, offering a compelling alternative to mature markets facing slower growth.
