Last year was not an easy one for emerging market (EM) investors, as a variety of macro factors (rising interest rates, inflation, a strong dollar) combined to make for a strong headwind. It’s likely that those themes abate this year, as inflation seems to be approaching a peak and with it the expectation of fewer interest rate rises. The dollar has also weakened somewhat, which is the first of three factors that we believe lay the groundwork for better returns from EM this year.

The second is developments in China. It’s ‘zero-Covid’ policy became increasingly unsustainable last year, culminating in rare public protests and an eventual end to the policy late in the year. The prospects of an economic and societal ‘reopening’ for China has helped provide support for EM equity indices over the last three months. The scale of its impact could be very significant indeed – over the course of the lockdowns around $5 trillion of additional household savings has been accumulated (that’s 1.5x UK GDP) – that’s a lot of potential ‘revenge’ spending. Obviously, we don’t expect those excess savings to be deployed in one go – it will take time for consumption to ramp up– but nevertheless it should provide some valuable buoyancy to growth in China and the region.

Thirdly, it’s also important to note the likelihood for a prolonged growth differential between EM and developed markets (DM), as EM countries just don’t have the same issues with inflation nor the same pressures on central banks to hit the brakes on growth. EM is expected to grow 4% this year, according to the IMF. This compares to 0%-1% in most of the developed world. This is a situation that has historically boded well for the performance of EM assets.

Returning to the subject of China, it is apparent that a major focus for the government is to bring growth back after three years of very restrictive lockdowns. The goal is for China to be a middle-income country by 2035, which entails a doubling of its GDP per capita from c.$10,000pa to over $20,000pa. The road to get there will create a vast array of opportunities for corporates across all sorts of sectors such as life insurance where growth tends to accelerate when GDP per capita goes above $10k. More disposable income also means more leisure activities and travel. Meanwhile China’s beauty and aesthetic medical market is one of the fastest growing in the world. As active investors across emerging market equities, including of course China, these are some of the areas we are identifying attractive long term investment opportunities.

Finally, there is much talk in the news about tensions between the US & China: trade wars, tariffs, geopolitics. It is interesting and perhaps surprising to note however that, beyond all the headlines, trade between the US and China continues to grow. In fact, 2022 marked an all-time high between the two countries. China’s competitive advantages in global supply are proving difficult to challenge.