With China on ‘extended’ path to reopening, emerging market equities will outperform peers in developed economies, record double-digit growth, Allspring analyst says
- Double-digit upside is backed by better economic recovery and earnings growth into next year, portfolio manager focusing on emerging market equities says
- China is in a position to easily introduce more supportive economic policies and its economic recovery into 2023 could still look rosy
Emerging market equities are expected to record a double-digit rebound from the current low valuations and outperform developed economies towards the end of 2022 and next year, with China on an “extended” path to reopening, according to Allspring Global Investments.
The double-digit upside is backed by better economic recovery and earnings growth into next year, said Elaine Tse, a portfolio manager focusing on emerging market equities at the US-based asset management firm.
“When things are at their worst is really the best time to be investing, which is a little bit what it feels like right now,” said Tse, who has around 30 years of experience in investment in emerging markets. “We’re looking for that inflection point, in fact, to be now – for emerging markets to start outperforming developed markets.”
China’s reopening would be gradual, Tse said, given its large population and the as-yet-unknown impact that the government is concerned about once it reopens.
“Reopening could be extended,” she said. “We have to separate two things. One is optimism in the market. And then optimism in the market only because of the reopening, because if that’s the only reason for the market to perform, then I think we have to be a little more cautious.”
“Reopening for China, from Covid-19 [restrictions], for such a large population, and to manage it with numbers that they would be comfortable with, is in fact, not that easy,” Tse said.
The Chinese market can swing to recovery easily once it has more clarity on economic policies. This clarity was missing following the 20th Party Congress at the end of October and disappointed the markets, Tse said.
The country is in a position to easily introduce more supportive economic policies, even under semi-lockdown or slower reopening scenarios, and its economic recovery going into 2023 could still look rosy. But volatility will continue as the government is expected not to have a clear tone on its policies before the Central Economic Work Conference in December.
“But you certainly can see a bottoming of the market and the beginning of stronger performance,” Tse said.
Emerging markets as a whole have faced a brutal year, with the MSCI index plunging 24.3 per cent year-to-date. Emerging market equities and funds have been hammered by rising geopolitical tensions amid Russia’s invasion of Ukraine and ongoing US-China tensions. Slower economic growth globally and currency headwinds after the US Federal Reserve started aggressively raising interest rates also hurt these equities.
The Emerging Markets Equity Income Fund co-managed by Tse, for instance, fell about 20 per cent year-to-date, even if it outperformed the MSCI index’s 24 per cent loss. The Vanguard Emerging Markets Stock Index, the largest fund in the diversified emerging markets group according to Morningstar, fell 10.7 per cent year-to-date despite a 8 per cent rise this month.
Emerging economies will hold up better than developed markets, whose central banks are lagging behind the curve when it comes to raising interest rates, Tse said. Emerging markets will benefit from their rich resources – for example oil in Gulf countries, and copper, lithium and aluminium in Latin America – in a commodity cycle.
“What we need is for the geopolitical noise to be a little bit more quiet,” Tse said.