July twenty-fourth, two thousand twenty-five
《EM’s Re‑Entry Dilemma & China: Exports, Jobs, and Capacity Clearing》
《The emerging markets’ reinvestment dilemma & China’s exports, employment, and capacity clearing》
I.The strategy of going long EM assets continues to outperform
The first part updates trading conditions in emerging markets. The year-to-date gain is nearly 20% for EEM, and about 10% year to date for GBI-EM, with both substantially outperforming dollar-denominated assets (SPX, EMBI, AGG)...
Chart: EM FUND PERFORMANCE
Beyond prices, another key focus is capital flows，The market has long expected inflows into emerging-market funds to provide a stronger boost to local asset performance However, EPFR’s data show that, so far, inflows into global EM funds remain modest.
One reason for the discrepancy is that A lot of capital is being withdrawn from Western asset managers and returning to EM’s onshore market,
Taking Chinese onshore fund data as an example, the rolling tally for the past 13 weeks shows that nearly 200 hundred million dollars of capital has returned:
Chart: An unusual reversal in the flow trend for local-currency funds
This will lead to slower-moving institutional managed funds facing a difficult dilemma over whether to add to their positions That is, on the one hand, Market prices have already largely priced in the expectation that they may buy, so entering now means missing out on cheap shares. On the other hand, at present, EM assets really are among the relatively better allocation choices in the beauty contest.
The dilemma over adding to positions means EM assets may enter a consolidation phase at the index level, although further gains remain the expected path.
Second, the discussion of exports and employment in Notes250722 “13 Takes on China’s Market,”
Two details to add:
1) If deflationary pressure bottoms out but nominal wage growth fails to pick up, this will further suppress real wage growth, which is a direct long-term indicator for going long domestic-demand sectors, If real wage growth fails to pick up, domestic demand can only be a narrative trade and cannot be a core holding(until the downward trend in wage growth reverses)。
According to the latest wage-tracking data, wage growth has been trending downward since the first quarter of 23. By the second quarter of 25, the year-over-year wage growth rate had fallen to 3.9% by this measure, its lowest level outside the pandemic period:
Chart: Nominal wage growth in the second quarter of this year reached its lowest level outside exceptional periods
2) The improvement in export growth competitiveness currently comes mainly from the depreciation of the renminbi, not from lower export prices.Trade routed through other countries to the United States may be easing downward pressure on prices. If these channels are cut off (or subjected to stricter restrictions),exporters will be forced to cut prices further and by a greater amount, weighing on profitability...
Of course, export resilience cannot be explained solely by transshipment trade, but both factors actually lead to the same result:
Chart: Broader export growth
A surge in exports to a particular group of transshipment countries may have special causes, But after the United States sharply raised tariffs, China’s exports to other regions also grew. This points to something else: exporters are eager to develop more new export markets, and that is what is happening now...
For exporters seeking to sell goods in new markets they have not previously entered, or to capture more market share in the short term,
trading price for volume is inevitable, and this will also hurt exporters’ profitability：
Chart: Markets reach equilibrium through prices, not through fixed allocations
A simple economic logic: if China does not export goods to the United States via transshipment, it must export them to other parts of the world. If the supply of goods to the rest of the world increases while demand stays unchanged, prices have to fall to generate additional demand.
We will selectively avoid exporters.
Chart: More details
Third, finally, a recommended read on capacity reduction Reposted from Henry Luo:
(1) Solar photovoltaics remain at the bottom of the cycle and are closest to reaching a turning point when demand recovers; (2) electric vehicles have the weakest margins and steepest cost curves, while capital expenditure trends are driving further industry fragmentation, making consolidation most necessary during the downturn; (3) compared with other industries, leading manufacturers of air conditioners, lithium batteries, and construction machinery have almost unassailable relative cost advantages.
In terms of capital flows, investors are mainly buying coal and steel, followed by solar modules and automobiles. More noteworthy is the partial unwinding in the Chinese market of the “barbell strategy” that had been popular since the start of the year—that is, buying large-cap, high-dividend stocks and small-cap stocks.
Although reflation trades remain a focus, capital flows show a trend toward unwinding this strategy. Over the past week, institutions have tended to sell banks and insurers while increasing their rotational allocations to technology, brokerages, and solar.
...
This section can be read alongside the capacity-cycle series report published by GS in 24 8. It explains the operating stages of each industry fairly clearly; see “China’s capacity - imbalances, inflections, and beyond cycles.” It is also posted in the community.
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Wishing you all the best.
2025.07.24
Note: Everything in this article is for reference only and does not constitute investment advice, nor is it a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.