Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How China Profit Surge Reshapes Emerging Markets Investing
Transcript
- Lucas: China industrial profits just jumped 24.7 percent in April. That's the fastest gain in over two years, and it's a number that should make anyone with emerging market exposure sit up and pay attention. Luna: Twenty-four point seven percent is huge. But is it a genuine recovery or a one-month fluke driven by base effects? Lucas: That's exactly the question. The headline is attention-grabbing, but you have to dig into the components. The profit surge is being led by manufacturing — particularly machinery, electronics, and chemicals. And it's happening despite the fact that the EU is pushing its de-risking agenda and the Strait of Hormuz situation is keeping oil elevated. Luna: So companies are making more money even with higher input costs. That suggests pricing power or cost efficiency gains. Lucas: Right. The profit margin in Chinese industrial firms is expanding for the first time in six quarters. That's a signal that the deflationary pressure we've been worried about might be easing. If margins stabilize, that's a fundamental support for Chinese equities that goes beyond just stimulus hopes. Luna: And it's happening while the rest of the world is dealing with a mixed picture. The S&P 500 is up 2.3 percent in the last five days, but the Russell 2000 is up 6.3 percent. Small caps are ripping. Lucas: That divergence is telling. The Russell 2000 rally has been a recurring theme on this show — and it's tied to the same reflation narrative. If China's industrial engine is revving again, that supports commodity demand and global trade. Small caps in the US are more domestically focused, but they also benefit from a synchronized global upturn. Luna: Right, because they're more cyclical. So the China profit number could be the confirmation that the global manufacturing cycle is bottoming. Lucas: Exactly. And it aligns with what we're seeing in the bond market. The ten-year Treasury yield is at 4.56 percent, the two-year at 4.13. That spread has widened to about 49 basis points. A steepening yield curve typically signals that growth expectations are improving. Luna: But the VIX is still at 17, which isn't exactly complacent but isn't panicked either. So the market is pricing in a recovery, but not without risks. Lucas: And those risks are real. The headline that caught my eye was that the Strait of Hormuz could remain closed for months. That's a direct threat to oil supply and a potential drag on any country that's a net importer. China is the world's largest crude importer, so higher oil costs eat into those profit margins. Luna: So the profit surge is impressive, but it's happening against a backdrop of geopolitical uncertainty and energy price risk. How do you square that? Lucas: You have to disaggregate the data. The profit jump is broad-based, but it's not uniform. For example, oil and gas processing profits actually fell because of the higher crude costs. So the sectors that are benefiting are the ones that are less energy-intensive or that have passed on costs. Machinery and equipment makers are seeing strong demand from both domestic infrastructure and export orders. Luna: And exports are being boosted by the weaker yuan. So there's a currency tailwind as well. Lucas: Yes. The yuan has been under pressure against the dollar, which makes Chinese goods cheaper abroad. That's helping export volumes. But it also makes imported raw materials more expensive. So the margin story is really about which companies have pricing power and which don't. Luna: So for an investor looking at emerging markets, how do you play this? Do you buy a broad EM ETF, or do you need to be more selective? Lucas: I think you have to be selective. The MSCI Emerging Markets index has a heavy weighting in China, but also in Taiwan, Korea, India. Each has different dynamics. China's profit recovery is encouraging, but India is growing faster in GDP terms. The key is to look at which economies have improving corporate profitability, not just GDP growth. Luna: And that's where the profit margin data becomes crucial. A 24.7 percent profit jump sounds amazing, but if it's from a low base and margins are still below their historical average, it's more of a normalization than a boom. Lucas: Exactly. The profit margin in Chinese industry is around 5.5 percent now, up from 5.0 percent a year ago. But the long-term average is closer to 6.5 percent. So there's room to run, but it's not yet a full recovery. And the sustainability depends on whether demand holds up. Luna: Demand from where? Domestic consumption in China is still weak. Retail sales are growing but not booming. Lucas: Domestic demand is a question mark. The property sector is still in a slump, and consumer confidence is recovering slowly. So the profit surge is largely export-driven and infrastructure-driven. That makes it vulnerable to any slowdown in global demand. Luna: Which brings us back to the US consumer. If the US economy slows, China's export machine stalls. Lucas: Right. The US economy is still growing — real GDP growth annualized at 2.0 percent in the first quarter of 2026. That's decent, but not strong. And the yield curve is still relatively flat, so there's no big growth acceleration priced in. China's profit story is real, but it's fragile. Luna: So what's the actionable takeaway for our listeners? We're not giving investment advice, but how should they think about this? Lucas: I think the takeaway is to watch profit margins, not just profit growth. If China's industrial margins continue to expand over the next two quarters, that's a stronger signal that the recovery is durable. For now, it's a positive data point that supports the case for a cyclical upturn, but it's not yet a green light to pile into Chinese equities. Luna: And speaking of making informed decisions, one thing that helps us keep bringing you these deep dives is that we don't run ads on the show. If our conversations have helped you think about a market move or an allocation differently, you can support that independence at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep the show ad-free and focused on the numbers that matter. No pressure at all — just if you find value in it. Luna: Exactly. Now, back to China — one other thing I want to flag is the European angle. European companies are doubling down on China manufacturing despite the de-risking push. That tells me the profit opportunity is real enough to outweigh political pressure. Lucas: That's a great point. Even as governments talk about reducing dependence, corporate behaviour shows that China's manufacturing ecosystem is still hard to replicate. The profit margins there, the supply chain integration — it's sticky. So the profit surge isn't just a cyclical bounce; it reflects structural advantages. Luna: But those structural advantages could be eroded over time if tariffs or sanctions increase. So it's a delicate balance. Lucas: It is. And that's why the profit margin data is so important. If margins hold up despite trade tensions, it confirms that Chinese firms have pricing power. If they compress, it suggests the benefits are being competed away or taxed away. Luna: So over the next few months, we should watch the monthly industrial profit releases. If April wasn't a one-off, we could see a sustained rotation into EM assets. Lucas: Exactly. And we'll be watching right along with you. Thanks for joining us on this episode of The Bear Market Podcast.