EM Ex-China Losing Its 'China Tether'

Goldman Sachs note that “EM benchmarks have changed significantly over the years from a compositional standpoint. As an example, BRICs markets comprised just 23% of MSCI EM in 2002 and rose to 50% by 2020. With Russia out of the index (4% weight in late 2021), other regions are likely to rise in influence (e.g., MENA now accounts for 7% of MSCI EM).”

• “EM ex-China equities are losing their 'China tether.' The return correlation between EM ex-China and MSCI China has declined over the past five years (while the correlation of EM ex-China and the US Dollar has risen). Correlations between MSCI China and EM ex-North Asia (i.e., Korea and Taiwan) are now on par with those of MSCI China and DM equities.”
• “Where from here? We have outlined the case that Chinese equity valuations embed significant risk premia at current levels, though we find several EM opportunities that can perform if MSCI China volatility persists. Given the likely impact of further Fed hikes and commodity market tightness, we highlight tactical opportunities in Brazil, Chile, Poland and Saudi Arabia.”