Emerging Markets Insights | June 2023
Three things we’re thinking about today:
- Artificial Intelligence (AI) is driving increased chip demand. Semiconductor chip design company NVIDIA announced earnings in its fiscal second quarter are expected to surge 52% to US$11 billion on demand for its chips which support AI algorithms and large language models similar to Chat-GPT. The announcement drove the Philadelphia Semiconductor Index up 10%.1 NVIDIA is a “fabless” chip company, meaning it designs chips, but does not manufacture them. The fabrication plants that do the manufacturing for such companies are mostly based in Asia and are direct beneficiaries of the surge in demand for chips that can support the coming AI revolution. This is expected to have a positive impact on the semiconductor ecosystem throughout Asia, ranging from chip manufacturers in Taiwan and South Korea to chip packaging companies in Malaysia, as well as those companies producing the chemicals and precision parts used in the lithographic machines that produce the chips from silicon wafers.
- China cuts deposit rates. Chinese banks recently cut deposit rates to support bank profitability and ensure that loan targets are met. Net interest income contributes c. 70% of Chinese bank revenue,2 and prior cuts in lending rates without corresponding cuts in deposit rates have put downward pressure on revenue. Deposit rates were cut 30-50 basis points for corporate and retail depositors. The rate cuts are expected to stimulate household consumption as well as support bank loan growth and return on equity. Unofficial targets of 10% loan growth and a 30% payout ratio amongst the “Big Four” Chinese banks imply the need for a return on equity of 10%-12%, which was at risk from the downward pressure on net interest margins. Maintaining credit growth is important for the economy given its dependence on bank credit, as opposed to other channels for recycling the large pool of household savings.
- Emerging market fund flows. Following a lackluster start to the year, foreign investor flows to emerging market (EM) equities surged in May. Data from Lipper indicates US$2 billion in inflows between May 3-24, a positive signal. Equity fund flows to India were notable, rising to a nine-month high in the month. The improved sentiment towards EMs may reflect the valuation gap relative to developed market equities as well as diverging growth expectations for the second half of 2023. Current consensus expectations call for the United States and Europe to enter a recession, but growth in emerging markets looks likely to remain resilient.
Endnotes
- Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
- Source: FactSet.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Investments in fast-growing industries like the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
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