NEW YORK, NY – A weakening U.S. dollar and falling interest rates typically provide a significant boost to emerging markets, and for China, often a laggard in recent global rallies, this trend could offer a rare positive catalyst. According to analysts at UBS, Chinese markets have demonstrated a strong historical linkage to easier U.S. monetary policy, suggesting potential for an uplift.
While the U.S. equities market saw little immediate reaction to the Federal Reserve’s first rate cut since December, historical data points to a different story for China. UBS analysts observed that in the six months following the initial U.S. rate cut of the past three easing cycles (2007, 2019, and 2024), the MSCI China index delivered an average return of 11%. This performance significantly outpaced both broader emerging markets and global markets by 7 and 13 percentage points, respectively.
Historically, offshore listings of Chinese companies, such as New York-listed ADRs (American Depositary Receipts) and Hong Kong H-shares, have typically outperformed domestically traded A-shares during these periods. If past trends hold, China’s technology-heavy sectors stand to benefit the most. Previous easing phases saw segments like data centers, internet platforms, and semiconductor stocks rally by more than 25% relative to the overall market. In contrast, cyclical and defensive names, including energy producers, power utilities, and transport operators, have tended to lag. Interestingly, even high-beta sectors like autos, insurance, and property underperformed, suggesting that rate relief alone may not be sufficient to fix fundamentally challenged business models.
Caveats Amidst Weak Sentiment:
However, the current Fed easing cycle unfolds against an unusually weak sentiment toward China. Foreign investor positioning remains light, reflecting concerns over patchy growth, opaque policy signals, and a lack of clear catalysts beyond attractive valuations. Despite the historical trends, UBS itself expresses a preference for onshore A-shares this time, anticipating that local retail inflows will likely outweigh foreign investment into ADRs.
Nevertheless, the macroeconomic momentum may at least stop working against Beijing. UBS projects further U.S. rate cuts totaling 75 basis points in October and December, alongside a weaker dollar that could push the USD/CNY exchange rate to 7.10 by year-end. Such developments would ease pressure on China’s currency, reduce funding costs, and mitigate capital outflows.
For investors, the report suggests that a belief in a full-blown China recovery may not be necessary. Simply believing that conditions will stop deteriorating could be sufficient. Given that the Chinese market is currently priced at a 30% discount to developed peers, a short reprieve based on stabilizing conditions could offer a compelling opportunity.
