Three overlooked opportunities from China's reopening

Three overlooked opportunities from China's reopening

This article first appeared in Livewire markets on 28 March 2023

Stubbornly high inflation and rapidly rising interest rates will likely be the driving force behind whether the world goes into a US-led recession. Traditionally, emerging market assets have been hit harder in a recession that starts in developed markets for the simple reason that a high US Dollar makes servicing emerging market debt more expensive.

But this time may be different, according to Amit Goel of Fidelity International, because living with inflation has become a way of life for many developing economies.

"Emerging markets have always lived in a relatively high inflation environment and a high interest rate environment. But this time, they are relatively better off."

The exception to this rule (as of writing) is China where three years of lockdowns significantly limited consumer spending and activity. And although China reopened in December, Goel believes you can still find specific opportunities three months after the fact.

In this edition of Expert Insights, Goel reveals those three ideas (one stock and two sectors) while making the case for why Australian investors need to have exposure to emerging markets now.

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EDITED TRANSCRIPT

LW: Why should Australian investors consider emerging market assets now?

Goel: When you think about emerging markets, I think at most point of time emerging market present you very different sets of opportunities. It's not a homogeneous asset class. It's a very heterogeneous asset class.

When you look deeper into emerging markets, you will find that every region, every country, every sector has very specific opportunities that investors can bank on and especially at this point of time when everybody's worried about a US led recession. I think a lot of parts of emerging markets are in a better place from a financial point of view, from companies health, from countries health, from balance sheet point of view.

So, if you combine a stable macro in a US led recession and the kind of opportunities that we have grounds up, I think it's a very good starting point for emerging markets for Australian investors.

LW: Are there any specific opportunities left from China's reopening?

Goel: China did a big U-turn last year. Nobody expected it, but they came out of Covid in a very good shape. The consumer has saved a lot in last two years. If you think about saving rates, it used to be around low thirties (35-36%). So there's a lot of pent-up demand to be released in China. The market is always forward-looking. So we got a big rally in China in last couple of months. But what we see now is that a recovery is patchy. So it's not a very broad-based recovery. And when things are patchy, things are volatile, you always find opportunities.

I think there are a couple of stocks that we are looking at or a couple of areas that we are looking at. If you think about a sector like sportswear, which has been a structural growth sector for China, as per capita consumption of sportswear is going to increase. It's still very low versus Western counterparts. We will continue to see a pent-up demand releasing in that sector, which was almost zero growth last year.

So we own one of the largest sportswear brand in China called Li Ning (HKG: 2331). And I believe that it's a very strong reopening play. The stock has come up very nicely, but it has gone down in recent times. So it presents as a good opportunity and then a very stable sector like dairy.

It's a very large market in China, consumer is premiumising and that premiumisation will continue even after reopening. So if you think about very specific opportunities, we like areas like sportswear, we like areas like dairy, and we like areas like advertisements. Especially outdoor advertisements, which was very weak during COVID times.

LW: How does inflation and high interest rates impact emerging markets?

Goel: Emerging markets have always lived in a relatively higher inflationary environment and a higher interest rate environment. And actually, if you compare what's history of emerging markets, this time they're relatively better off. But emerging markets is not a homogenous asset class, so there is no emerging market inflation of interest rates. It's very different in different parts of emerging markets.

So in North Asia, inflation is low single digit to mid single digit and interest rates are about three to 5%. You go to South Asia and places like India and Indonesia, where inflation is about 5, 6, 7% and rates have been increased to 6-7%.

In Latin America, inflation has gone to double digits, but rates have already gone to double digits. So actually this time, emerging markets have been ahead of the curve versus developed market. And that's what we see in stability of emerging markets where there are positive real rates in most part of emerging markets.

LW: What is your process for finding stocks in emerging markets?

Goel: We go deeper into each emerging markets and find out opportunities that we believe are right on the penetration curve. So if you think about China, we are very much in favour of consumption's improvement, the premiumisation of the consumer, and the Chinese government's focus in changing the economy from fixed asset investment towards consumptions. And here we try to understand the consumer grounds up - what are their choices, what are their aspirations, what kind of brands, products, services they're looking to buy in future.

That's where sectors like sportswear, sectors like dairy, where premiumisation is going to happen over the next five, 10 years are the most interesting opportunities that we believe sits in that place.

You come to India where you have a huge middle class, which is growing. GDP per capita is still $2,500 per annum. And we believe that this middle class is going to now use products sensor, which are more discretion in nature. They're going to buy cars, they're going to buy houses, they're going to buy consumer electronics, and they're going to leverage up.

We are very much interested in some of the private sector banks in the country, which benefit from consumer leverage. And we like sectors like consumer electronics, we like sectors like autos. And that's where I think our grounds of knowledge, the presence of our teams in these markets is very essential to our kind of research, to our opportunity and idea generation in emerging markets.

28 March 2023

China Emerging markets

Amit Goel

Amit Goel

Lead-Portfolio Manager, Fidelity Global Emerging Markets Strategy and Portfolio Manager, Fidelity India Fund

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