Comparing MSCI Emerging Markets and MSCI Emerging Markets Ex-China Indices in the Wake of Monetary Tightening Cycle

When it comes to Friday’s Fed’s hawkish rhetoric, markets will suffer, but the most exposed of them to this kind of environment are the GEMs, global emerging markets.

Emerging market stocks were set on Friday for their worst week in five months. MSCI's index of emerging market stocks, MSCIEF, declined precipitously when comments from Fed Chairman Powell saw markets raise bets for an aggressive monetary policy tightening cycle this year.

While most global exchanges thereafter reclaimed some footing, China markets continued rout ahead of a week-long Lunar New year holiday, while the yuan CNY= rose 0.2% after its worst session since March 2020 when pandemic panic gripped the market. The China-heavy EM stocks index was on course for a weekly decline of 4.3%.

Graph 1. Percentage-point difference between the annual price return of the MSCI Emerging Markets Index and the MSCI Emerging Markets ex China Index (Source - Bloomberg):

While China has long been viewed separately from rest of the emerging market community thanks to its unique combination of size, growth momentum and market depth, the issue of transparency of the Chinese domestically listed companies such as China Evergrande and other major developers and insurers living on the brink of bankruptcies, has become more urgent in a year when geopolitical and regulatory risks helped wipe out more than $1 trillion in market valuation from U.S.-listed Chinese stocks.