Asian emerging markets show resilience with China’s re-emergence underway
Emerging markets (EM) have historically offered an attractive economic growth premium to developed markets. This growth story has been a little lacklustre of late, in part because China’s recovery has been unevenly distributed and growth has been slower than investors had hoped for. However, China’s recent Politburo meeting signalled broad support for the property sector and boosting consumer spending. Combined with the nation’s higher commodity prices, stronger fiscal positions, continuing easy monetary policy, and a weaker US dollar, we continue to see upside for the broader Asian economies over the medium term.
The International Monetary Fund (IMF) forecasts that Asia will generate 70 per cent of global growth this year and we continue to believe that China will play a central role in driving this regional growth. Although the economic recovery in China itself may not follow a linear trajectory, we do broadly see much greater resilience among emerging market economies than in previous cycles. The fiscal positions of EM countries have strengthened since the 2013 taper tantrum, with better current account balances, less dollar-denominated debt, and more significant foreign exchange reserves.
Decoupling and a diverse universe create a broad opportunity set
Disrupted supply chains are hastening the process of decoupling, and companies are increasingly looking to move their supply chains both closer to home (the trend of nearshoring) or to friendly partner countries (that of ‘friendshoring’). The China +1 strategy is a key dynamic, as developed-market companies spread out production to other countries with low-wage, high-skilled economies. This trend is also driving greater dispersion in returns among emerging economies. Countries such as India, Indonesia, and Vietnam will particularly benefit.
This shifting demographic picture in EM is accompanied by constantly evolving equity markets. Asia’s stock markets are home both to innovative companies in the technology, media, entertainment, and consumer discretionary sectors, as well as the commodity and financials businesses that should do well in an environment of higher commodity prices and interest rates.
Although the weighting of ‘new economy’ sectors like technology and internet has expanded on a relative basis over the past decade, the importance of ‘old economy’ sectors has reasserted itself over the past few years as commodity producers, energy companies and banks continue to drive growth. The importance of having balanced exposure to both new and old economy sectors is exemplified by the emergence of artificial intelligence (AI), which will be hugely disruptive not only for internet platforms and semiconductor companies, but also the copper and lithium miners that will fuel the enhanced computing power required by AI.
Opportunities in India
A relatively low penetration of goods and services in a large population with increasing GDP per capita points to strong structural growth opportunities in India. Growth in India’s consumer class will predominantly be among young people and those living in rural areas. India will benefit from the under penetration of both consumer goods and financial services, which will drive demand for everything from sneakers to credit cards. The ratio of credit to GDP in India is half the level of that in other emerging economies and has scope to grow considerably in the coming years, driving demand for the banks and financial services firms offering savings and insurance products.
India’s government’s focus on manufacturing and infrastructure building is also a key positive for the medium to long-term sustainability of economic growth. We are optimistic about its positive impact on consumption and employment, in addition to the structural drivers of growth, strong demographics, presence of quality institutions and a culture of entrepreneurship.
In summary, we see a number of positive short and medium-term drivers for emerging market equities, with positive macroeconomic tailwinds, a more robust commodity price environment, and an improved fiscal backdrop. Given that current valuations are at trough levels and seemingly out of sync with the improved fundamental environment, we think a particularly attractive entry point exists today for the Asian emerging market equity asset class.
