Emerging Market Links + The Week Ahead (October 17, 2022)
US decapitates China's semiconductor industry, China beyond urban centers, South Korea stocks, India opportunities, Chile's outperformance + deterioration and the week ahead for emerging markets.
The Chinese Communist Party's (CCP) 20th National Congress began on October 16 and there should be no surprises as Xi Jinping officially consolidates his power even further. The far more important news comes from the Biden Administration and their new rules prohibiting ‘US persons’ from supporting the ‘development or production’ of chips at targeted Chinese semiconductor firms which will wreak havoc on China’s chip industry.
Something I also came across and did not know: Not only do Chinese companies need to set up an internal party office when they have at least three party members working for them, securities investment funds in China now must do the same. That’s already turning off foreign investment funds.
Meanwhile, some foreign companies that focused on China’s countryside rather than the wealthier coastal cities or urban areas elsewhere have fared better; while William Blair and Franklin Templeton have pointed out the opportunities now available for investors in India and South Korea.
Finally, Chile who remains a key global supplier of lithium and copper that was once the free market and investment darling of Latin America, has deteriorated into something of an unstable welfare state (albeit no where near as bad as the perennial basket case of Argentina just next door). Nevertheless, the iShares MSCI Chile ETF (ECH) along with Chilean large caps are giving positive performances.
$ = behind a paywall
Washington’s latest export restrictions prohibit ‘US persons’ from supporting the ‘development or production’ of chips at targeted Chinese firms.
Several C-suite executives at affected companies worked in the US semiconductor industry and gained citizenship before returning to China.
According to a review of published C-suite profiles by listed Chinese companies – including AmLogic, Advanced Micro-Fabrication Equipment of China (AMEC), 3Peak, Starpower Semiconductor, ACM Research and Halo Microelectronics – there are dozens of executives in China’s chip industry with US citizenship.
I should have made more explicit that the first dozen tweets were not my own analytical takes but rather those of @lidangzzz, a prominent tech influencer and US-based entrepreneur.
Regardless of how narrowly Washington tries to draw the impact of these regs to allow for firms like LAM and ASML to continue working with Chinese companies on fabricating lagging edge chips, the explicit decision to try to freeze Chinese domestic manufacturing above a defined level will be perceived as a deeply provocative move, with lasting commercial, technological, and geopolitical repercussions.
“This mood has shifted from China being one of the most attractive places to invest in the world and how much certainty there was perceived to be in policy, to the fact that the rivalry [with the U.S.] has introduced an uncertainty element and quite a substantial risk element,” said Ketan Patel, co-founder and CEO of Greater Pacific Capital.
Chinese law has long required internal party committees — for companies with at least three party members. However, enforcement began to pick up only after 2012, according to the Center for Strategic and International Studies.
New rules from the China Securities Regulatory Commission that took effect in June say securities investment funds in China need to set up an internal party office. When asked about the new rules, the securities regulator said they are in line with corporate governance principles and Chinese law, and there’s “no need to worry at all” about data security, according to a CNBC translation of the Chinese.
But before the pandemic, he said, at least one large Western asset manager decided not to set up a subsidiary in China because once they learned establishing a party cell would be required, “that overcame all of the potential commercial gains.”
The Chinese Market Is More Than Just Its Urban Centers (Harvard Business Review)
A key difference between these two examples was not geopolitics but their choice of market-entry strategy. Best Buy chose to concentrate on China’s wealthier but hotly contested urban centers. When AMD entered China in 2004, it focused on selling cheaper products to attract price-sensitive consumers in rural markets. In this way, it could avoid competing with Intel, then the market leader. And as AMD’s senior executive in China, Pan Xiaoming, noted, even if only 10% of the 200 million households in the countryside wanted to buy a PC, that that would result in 20 million sales of PCs, along with the chips that went in them. AMD also participated in a government program called the “Appliances go to the countryside” which spurred its sales in these locations further.
Consciously or not, in entering China through the rural market, AMD was copying a strategy that was behind the success of many of China’s current champions. Pinduoduo, the largest interactive e-commerce platform in China, founded in 2015, is a case in point. Founder Huang Zheng initially focused on serving China’s less affluent cities or villages, thereby avoiding competition from the likes of Alibaba and JD.com.
5 Growth Opportunities in India (William Blair)
Personal Care Products, Consumer Durables, Housing, Digital Infrastructure and Financial Services.
We believe India represents an attractive market for our disciplined, bottom-up approach to seeking high-quality companies that can sustain their competitive advantage over time. In our view, India’s large, fragmented, and underpenetrated market, supported by favorable demographics and an underleveraged, growing emerging consumer class, creates a rich opportunity for growth investors.
South Korea’s market has seen sizable foreign outflows over the past year and a half, as it is very exposed to global market dynamics. The country’s exports are often thought to be a forward-looking indicator of the global economy. As such, we expect the equity market to recover as global market dynamics improve. From a bottom-up perspective, we think there is significant scope for stock picking in export-orientated structural growth opportunities.
The market has suffered from a phenomenon called the “Korea discount,” where valuations of listed companies in South Korea lag that of their peers. In our view, the reason for the lag is tied to corporate governance and capital allocation.
Volatility Storm Adds to Pain for Chile's Battered Markets (Bloomberg via Yahoo)
The last few months of white-knuckle trading in Chilean assets, on a par with the most unstable of its emerging-market peers, is erasing the final traces of the country’s reputation as the most stable of Latin America.
Mario Castro, a fixed income strategist at Banco Bilbao Vizcaya Argentaria SA in New York: “There has been a structural change in Chile, which involves an institutional deterioration and a shift toward a welfare state that will push up fiscal pressure.”
Back in 2017, Chile was rated AA- at S&P Global Inc., on a par with market favorites such as Taiwan and the Czech Republic. Then a mounting fiscal deficit led to a downgrade to A+ that year, followed by another cut to A in 2020.
Now, even that rating seems to flatter Chile, with its dollar debt trading at yields similar to those of countries with a BBB rating such as the Philippines, and far above similarly rated Saudi Arabia, according to data compiled by Bloomberg.
What really shook Chile and markets out of their 30-year slumber was the riots of October 2019 that brought the army back on the streets and saw the then president almost besieged in the Moneda palace. Nothing has been the same since.
The iShares MSCI Chile exchange-traded fund (ECH) is up more than 3% year to date, while the U.S. benchmark S&P 500 is down more than 20% — officially trading in a bear market. There are several catalysts driving this outperformance, including the rejection of a proposed new constitution.
A look inside the ECH shows that an overweight allocation to commodities helped the ETF this year, even as rising interest rates dinged emerging markets across the board. As of October, materials stocks made up roughly 30% of the ECH ETF, which has 25 holdings. The top holding is Sociedad Quimica Y Minera De Chile.
“We think it’s like a stock picker’s dream market,” said Richard Cook, portfolio manager at Cook & Bynum Capital Management, calling it “a fantastic place for a good fundamental stock picker to be looking if they could get access.”
BCA Research’s Budaghyan said most of the rally is limited to large-cap stocks, likely driven by buying from foreign investors.
Growth momentum continues but scarcer and costlier financing will slow the region’s economies, while inflation remains high.
Commodity exporters—South American countries, Mexico and some Caribbean economies—are likely to see their growth rates halved next year, as lower commodity prices amplify the impact of rising interest rates.
Cameroon Brand the director of research at EPFR, Inc. Global said that India has benefited from the scrambled reallocation of Russian exposure however global emergency market funds don't have money to back up that conviction at the moment.
Note: Investing.com has a full calendar for most global stock exchanges BUT you may need an Investing.com account, then hit “Filter,” and select the countries you wish to see company earnings from. Otherwise, purple (below) are upcoming earnings for US listed international stocks (Finviz.com):
Click here for the full weekly calendar from Investing.com containing frontier and emerging market economic events or releases (my filter excludes USA, Canada, EU, Australia & NZ).
Frontier and emerging market highlights (from IFES’s Election Guide calendar):
We were incorporated in Delaware in September 2021 to acquire assets and license intellectual property rights related to the production of isotopes using Aerodynamic Separation Process (“ASP technology”), originally developed and licensed to us by Klydon Proprietary Ltd (“Klydon”). We have an exclusive license to use the ASP technology for the production, distribution, marketing and sale of all isotopes.
Our initial focus is on the production and commercialization of enriched Molybdenum-100 (“Mo-100”). Klydon has agreed to provide us a first commercial-scale Mo-100 enrichment plant located in South Africa with a manufacturing capacity of 20 kg/year of 95% enriched Mo-100 when fully operational. We believe that the Mo-100 we may develop using the ASP technology has significant potential advantages for use in the preparation of nuclear imaging agents by radiopharmacies and others in the medical industry.
We operate principally through subsidiaries: ASP Isotopes Guernsey Limited (the holding company of ASP Isotopes South Africa (Proprietary) Limited), which will be focused on the development and commercialization of high value, low volume isotopes for highly specialized end markets (such as Mo-100 and others, including Silicon-28); Enriched Energy LLC, which will be focused on the development and commercialization of uranium for the nuclear energy market; and ASP Isotopes UK Ltd, which is the licensee of the ASP technology under the exclusive license agreement with Klydon.
Climate change and ESG are clearly the latest flavours of the month for most new ETFs. Nevertheless, here are some new frontier and emerging market focused ETFs:
9/22/2022 - WisdomTree Emerging Markets ex-China Fund XC - Passive, equity, emerging markets
9/15/2022 - KraneShares S&P Pan Asia Dividend Aristocrats Index ETF KDIV - Passive, equity, Asia, dividend strategy
9/15/2022 - OneAscent Emerging Markets ETF OAEM - Active, Equity, emerging markets, ESG
9/9/2022 - Emerge EMPWR Sustainable Select Growth Equity ETF EMGC - Active, equity, emerging markets
9/9/2022 - Emerge EMPWR Unified Sustainable Equity ETF EMPW - Active, equity, emerging markets
9/8/2022 - Emerge EMPWR Sustainable Emerging Markets Equity ETF EMCH - Active, equity, emerging markets, ESG
7/14/2022 - Matthews China Active ETF MCH - Active, equity, China
7/14/2022 - Matthews Emerging Markets Equity Active ETF MEM - Active, equity, emerging markets
7/14/2022 - Matthews Asia Innovators Active ETF MINV - Active, equity, Asia
6/30/2022 - BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF XEMD - Passive, fixed income, emerging markets
5/2/2022 - AXS Short CSI China Internet ETF SWEB - Active, inverse, thematic
4/27/2022 - Dimensional Emerging Markets High Profitability ETF DEHP - Active, equity, emerging markets
4/27/2022 - Dimensional Emerging Markets Core Equity 2 ETF DFEM - Active, equity, emerging markets
4/27/2022 - Dimensional Emerging Markets Value ETF DFEV - Active, equity, emerging markets
4/27/2022 - iShares Emergent Food and AgTech Multisector ETF IVEG - Passive, equity, thematic [Mostly developed markets]
4/21/2022 - FlexShares ESG & Climate Emerging Markets Core Index Fund FEEM - Passive, equity, ESG
4/6/2022 - India Internet & Ecommerce ETF INQQ - Passive, equity, thematic
2/17/2022 - VanEck Digital India ETF DGIN - Passive, India market, thematic
2/17/2022 - Goldman Sachs Access Emerging Markets USD Bond ETF GEMD - Passive, fixed income, emerging markets
1/27/2022 - iShares MSCI China Multisector Tech ETF TCHI - Passive, China, technology
1/11/2022 - Simplify Emerging Markets PLUS Downside Convexity ETF EMGD - Active, equity, options strategy
1/11/2022 - SPDR Bloomberg SASB Emerging Markets ESG Select ETF REMG - Passive, equity, ESG
Frontier and emerging market highlights:
8/22/2022 - iShares MSCI Argentina and Global Exposure ETF AGT
8/22/2022 - iShares MSCI Colombia ETFI COL
6/10/2022 - Infusive Compounding Global Equities ETF JOYY
5/3/2022 - ProShares Short Term USD Emerging Markets Bond ETF EMSH
4/7/2022 - DeltaShares S&P EM 100 & Managed Risk ETF DMRE
3/11/2022 - Direxion Daily Russia Bull 2X Shares RUSL
1/27/2022 - Legg Mason Global Infrastructure ETF INFR
1/14/2022 - Direxion Daily Latin America Bull 2X Shares LBJ
Check out our emerging market ETF lists, ADR lists (updated) and closed-end fund (updated) lists (also see our site map + list update status as some ETF lists are still being updated as of Summer 2022).
I have changed the front page of www.emergingmarketskeptic.com to mainly consist of links to other emerging market newspapers, investment firms, newsletters, blogs, podcasts and other helpful emerging market investing resources. The top menu includes links to other resources as well as a link to a general EM investing tips / advice feed e.g. links to specific and useful articles for EM investors.
Disclaimer: EmergingMarketSkeptic.Substack.com and EmergingMarketSkeptic.com provides useful information that should not constitute investment advice or a recommendation to invest. In addition, your use of any content is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the content.
Emerging Market Links + The Week Ahead (October 17, 2022) was also published on our website under the Newsletter category.