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Enter the dragon: Parsing Lunar New Year opportunities among emerging markets
As we enter the year of the dragon, Dina Ting, Head of Global Index Portfolio Management, assesses the opportunities and risks in China and Taiwan, which saw divergent market performance last year. She also highlights a region that not only has seen rising engagement with China but was also an EM bright spot that outperformed the S&P 500 Index in 2023—Latin America.
While Western season’s greetings are merry with wishes of joy, peace, love and blessings, those for Chinese cultures tend toward “good fortune.” In tandem with happiness for the Lunar New Year, wishes for prosperity are typical—and something that China investors could certainly use as we enter the year of the dragon.
China and Hong Kong markets had a humbling 2023 with equities down more than 10%. Fortunately, regulators in Beijing have turned up the dial on reform measures to stoke some of that auspicious dragon luck. Expectations are rising for even more support to come. In early February, China’s central bank made changes to allow its financial institutions to hold smaller cash reserves, cutting the reserve requirement ratio by 50 basis points. This is set to release nearly US$140 billion in long-term capital as Beijing seeks to boost targeted growth and market confidence.
A rise in the country’s passenger vehicle sales also offers some hope, and 2023 saw China surpass Japan as the world’s largest car exporter.1 Year-over-year retail passenger car sales were up 57% in January, according to the China Passenger Car Association. The country’s expertise in so-called new-energy vehicles—fully electric and plug-in hybrids—is partly responsible for the export surge.2 Another important shift to note is that China’s auto industry is increasingly shipping to wealthier countries—exports to Australia tripled year-over-year during the first half of last year and sales to Spain rose 17-fold to nearly 70,000 vehicles.3 With renewed government support, China’s electric vehicle (EV) makers are making a big splash on the world stage. Shenzhen-based automaker BYD overtook Tesla as the world’s top seller of EVs at the end of 2023, and China’s overall passenger EV sales are forecast to make up 59% of world sales this year, compared to 50% in 2019.4
Still re-opening
Beijing has also begun stepping up tourism and travel promotions, granting visa-free entry to 11 countries, with Singapore and Thailand the latest to be included. Other policies to combat soft consumer demand include simplified visa procedures that allow travelers to apply for entry permits upon arrival at some ports and lower visa application fees for some foreign nationals.
In our view, Beijing’s recent spate of new reform policies should hold long-term benefits for its state-owned enterprises (SOEs), including its “big four” banks, as well as corporations entrenched in the country’s energy sector. Of course, China’s domestic deflationary pressures and real estate market weakness remain dominant concerns.
Beyond the Magnificent Seven (Mag7),5 which drove US equity returns last year, the broader equity market had less impressive returns over the same period. Big tech’s outperformance, coupled with sharp declines in China, may have also obscured some encouraging trends for emerging markets (EM), where we saw pockets of stellar performance. Understandably, global investors may feel inclined to await more regulatory clarity before warming to China’s markets. Keep in mind that a typical EM portfolio, such as the FTSE Emerging Index, holds about a 25% weighting in mainland China versus 18% for Taiwan.6 The MSCI AC Asia ex Japan Index holds a 29% exposure to China versus 19% for Taiwan.7 So for a more precise, targeted approach, investors may consider low-cost single country-focused exchange-traded funds to express tactical views.
2023 outperformers
Instead of “Mag7,” perhaps “Fantastic Four” can catch on as a moniker for four pockets within EM markets that outperformed the S&P 500 Index last year. They are Taiwan, Mexico, Brazil and Latin America, which predominantly consists of its two largest economies.
Excluding China, EM stocks (as measured by the MSCI Emerging Markets ex China Index) returned 20.1% in 2023,8 with Latin America (as measured by the FTSE Latin America RIC Capped Index) faring well, up 33% for the year.9 The equity markets of Mexico (39.4%, as measured by the FTSE Mexico RIC Capped Index) and Brazil (33.3%, as measured by the FTSE Brazil RIC Capped Index) were standouts, and in Asia, tech powerhouse Taiwan (30.1%, as measured by the FTSE Taiwan RIC Capped Index) also posted stellar performance.10 For investors wanting to capture both of Latin America’s largest economies, the FTSE Latin America RIC Capped Index has a combined weighting of more than 90% in Brazil and Mexico, and notably lacks exposure to Argentina. In recent years, China has cultivated a growing influence in Latin America with trade pacts, overseas foreign direct investment and loans playing a major role in its strengthened ties with the region. While India’s market slightly trailed the S&P 500 last year, it still exhibited robust growth and is increasingly seen as an appealing alternative to China among both businesses and investors.
When chips are down…
Looking ahead, analysts expect an ongoing resurgence in global semiconductor sales to continue boosting Taiwan’s market. Powered by artificial intelligence and 3D tech, the chips revenue comeback is forecast to see a low to mid-teens percentage increase this year.11 Furthermore, to meet growing demand in key markets, Taiwan’s most valuable chip giant plans to expand its global footprint. In collaboration with Sony and Toyota, Taiwan Semiconductor Manufacturing has new plans to build a second plant in Japan.
In January, Taiwan saw its overall exports expand for a third consecutive month with an 18% year-over-year rise.12 During the month, the ruling Democratic Progressive Party’s (DPP) retention of the presidency in Taiwan’s recent elections appeared to support continuity in its economic policy. Although cross-straits relations continue to pose risks, markets had largely factored in the pro-independent DPP’s narrow victory.
- Source: “China Overtakes Japan As World’s Biggest Vehicle Exporter.” Barron’s. January 31, 2024.
- Sources: Xinhua news agency, China Passenger Car Association.
- Source: “How China became a car-exporting juggernaut.” The Economist. August 10, 2023,
- Source: BloombergNEF.
- The Magnificent Seven are (Mag7) Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla.
- Source: FTSE Russell, February 13, 2024. The FTSE Emerging Index provides investors with a comprehensive means of measuring the performance of the most liquid large- and mid-cap companies in the emerging markets. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
- Source: MSCI, January 31, 2024. The MSCI AC Asia ex Japan Index captures large- and mid-cap representation across two of three developed market countries (excluding Japan) and eight emerging market countries in Asia. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
- Source: Bloomberg, as of December 31, 2023. The MSCI Emerging Markets ex China Index captures large- and mid-cap representation across 23 of the 24 emerging market countries excluding China. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
- Source: Bloomberg, as of December 31, 2023. The FTSE country and region RIC Capped indexes represent the performance of the respective country’s or region’s large- and mid-capitalization stocks. Securities are weighted based on their free float-adjusted market capitalization and reviewed semiannually. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
- Ibid.
- Sources: Deloitte, Semiconductor Industry Association, Gartner, Inc.
- Source: Ministry of Finance, Republic of China, February 2024.
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The iShares 20+ Year Treasury Bond ETF (TLT) holds US government bonds that mature in 20 years or more. Since peaking in March 2020 at $179.90 per share, TLT’s price is still down roughly 50%. Most of that drop happened as US inflation – and then interest rates – rose to multi-decade highs. But with inflation now below 3%, potential interest rate cuts ahead, and an interesting chart setup, the investment case for TLT could be building.
What is TLT?
The iShares 20+ Year Treasury Bond ETF (TLT) is an exchange-traded fund (ETF) that trades on the US stock market. The fund holds “long-dated” US government bonds with maturities of 20 years or more. By holding a basket of them, TLT reflects how investors generally value this part of the bond market.
Each bond in TLT is a 20-plus year loan to the US government. The investor lends money, and in return receives fixed interest payments (coupons) each year. The government sets the coupon rate when it issues (creates) a new bond, and that rate never changes. After issuance, the bond can trade on the bond market, where its price may move up or down.
What affects the value of long-dated US Treasury bonds (and TLT)?
All else being equal, long-dated Treasury bonds tend to be more volatile than shorter-dated ones. Interest rates and inflation expectations are the two main levers that can move their prices – and hence the price of TLT.
Interest rates: When rates rise, newly issued bonds pay higher coupons. Older bonds in TLT can then look relatively less attractive, so their prices may fall. When rates fall, it’s the opposite: new bonds pay lower coupons, so older bonds look “better” and may rise in price. Because TLT only holds long-dated bonds, its price tends to react more to interest rate changes than short-term bond funds. Rate shifts tend to have a bigger impact on long-dated bonds because their fixed coupons extend far into the future. Even a small change in yields can make those older coupons look much better – or much worse – for a very long time.
Inflation expectations: When investors expect higher inflation in the future, the fixed coupons (and principal) in TLT can look less valuable in today’s money. That perception can push bond prices down as investors sell bonds. And when investors think future inflation will be lower, the same coupons can look more valuable today, which may support bond prices. Because TLT’s bonds mature further into the future, inflation has more time to erode their interest and principal repayments. That’s why long-dated bonds are usually more sensitive to inflation than shorter-dated ones.
The chart below compares the price of TLT (orange) with US interest rates (black) and US inflation (blue). It’s not an exact science, but TLT has tended to move opposite to both of them since the ETF launched in 2003.
Other factors can also play a role. The US government regularly issues (creates) new bonds, and if supply goes up, prices can fall. On the demand side, big buyers like pension funds, insurance companies, or foreign central banks can move the market. Credit risk perception is also key. Investors usually see Treasuries as very low risk, but not “risk-free”. So if they lose confidence in the US government’s repayment ability, it could hurt bond prices.
The investment case for TLT today
We’ve explained how lower interest rates and lower inflation might be a better environment for long-dated US treasury bonds. As explained below, there are reasons to believe we could be moving into that environment now.
The US Federal Reserve (Fed) essentially has two jobs, and it’s a constant balancing act between the two:
- Keep inflation down (by raising interest rates to slow the economy).
- Keep employment high (by lowering interest rates to speed up the economy).
US inflation peaked above 9% in June 2022, and it’s been trending lower ever since. Inflation isn’t very low yet (2.9% CPI as of August) – but it’s low enough for the Fed to focus more on job number two. Factor in a slowing economy, and the Fed is more likely to cut interest rates from here to boost employment numbers.
The chart below shows the US unemployment rate in orange. It’s now at 4.3% (August) – the highest unemployment rate since November 2021. In the past, unemployment rose gradually at first, before eventually breaking much higher. If that pattern repeats, we could see a bigger spike in unemployment.
Not only is the unemployment rate rising, but the number of new job openings is dropping, too. US nonfarm payrolls (new jobs excluding farming, private households, non-profits, and the military) showed that the US economy added just 22,000 new jobs in August.
And to make matters worse, the government also revised its earlier estimates down. The adjustment meant the US added around 911,000 fewer jobs in the year through March 2025 than first reported.
AI could also factor into these numbers. After all, companies are rolling out AI tech to improve productivity – and that puts pressure on the “human” job market. AI can also make goods and services cheaper to produce, which is inherently disinflationary (the opposite of inflation).
This setup could give the Fed more ammo for bigger rate cuts in the future. Throw in lower inflation, and we could see a solid backdrop for TLT.
The technical picture for TLT
Not many assets are trading near 20-year lows. But as the chart below shows, TLT is trading near technical “support” from the early 2000s (orange). Also note that TLT recently broke above a downward sloping trendline that’s been in play since December 2021. This may signal that selling pressure is easing, and buyers are stepping in.
The chart below shows Bollinger Bands around TLT’s price. Here, the middle band is TLT’s 20-month average price, and each red or green candle represents one month of price movement for TLT.
The further the outer bands are from the middle band, the more volatile TLT’s price, according to the indicator. At this point, the Bollinger Bands are pinching together – a sign of relatively low volatility for TLT. Volatility tends to be “mean reverting” – meaning it usually cycles from periods of lower volatility to higher volatility. If the bands now start to widen, and the price trends higher, we could see a sustained rally for TLT.
The next chart zooms into the weekly timeframe, where each red or green candle represents one week of price movement for TLT. In this case, the Bollinger band width represents the volatility of TLT around its 20-week moving average. The blue line underneath it shows the width of the Bollinger Bands – lower is narrower, and less volatility.
Last month, the Bollinger Bands reached their narrowest level since September 2018. In other words, TLT’s volatility reached its lowest level in seven years, according to the indicator. Now notice how the bands started expanding this month – from that very low volatility base. This suggests TLT could see more volatility going into the end of 2025. Keep in mind that volatility is direction neutral.
Risks
The investment case for TLT depends heavily on inflation staying low and the Fed being willing to cut rates. If inflation rises again, TLT may fall further. Heavy government borrowing could also pressure Treasuries if investors demand more compensation to buy the debt. And if the economy holds up better than expected, the Fed might not need to cut rates.
How IncomeShares ties in
The IncomeShares 20+ Year Treasury Options ETP holds TLT and sells call options on it.
• Selling calls generates option premiums that aim to provide monthly income.
• Exposure to TLT keeps the ETP linked to bond price moves.
• If TLT rises too far, gains may be capped to the strike price.
• If TLT falls, the option income may help cushion part of the drop.
Key takeaways
• TLT holds US government bonds due in 20+ years, which are typically more sensitive to interest rates than short-term bonds.
• After years of losses, inflation is lower, yields are higher, and economic data points to a slowdown – but risks remain.
• The IncomeShares TLT Options ETP aims to generate monthly income by selling calls, while keeping some exposure to TLT.
Follow IncomeShares EU for more insights.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
The Investment Case for TLT (Long-Dated Treasury Bonds)
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