09 Jan 2023
With China’s dramatic move away from its Zero Covid-19 policy in December, the virus is likely to sweep through cities rapidly with savage results. American vaccines, for political reasons, will not be approved for use in China but a domestic mRNA vaccine should be available over the next 3-6 months to the wider population.
Western commentators have highlighted how the new Politburo Standing Committee helps centralise power in the hands of one man. The market accordingly prices in a China risk premium. However, in practice, with the Beijing faction in total control, it is easier for the leadership to change policy rapidly. The change in the Covid-19 policy demonstrated that the apparent weakness in the economy could not be allowed to continue.
China has brought in further measures to support the economy by cutting interest rates and putting in place some supportive measures for the property sector. The most literal interpretation of its common prosperity policy is ‘growing wealthy together’ and the re-opening of the economy positions the market for a recovery. The government continues to reiterate that ‘property is for living in - not speculation’ and the authorities are happy to see prices stabilise in many cities after a downward readjustment.
Developed economies re-opening after periods of lockdown saw a rapid rebound in service sector activity and China is unlikely to be any different. Much of the youth unemployment is a direct result of Covid-19 policies as young people do not want to work in the manufacturing sector. Over time, the continued upgrading of consumer products in China, a trend known as premiumisation, will continue and we believe that China is likely to be the strongest economic recovery story in 2023. The improved economic outlook resulted in China being one of the strongest global markets during December.
In contrast to China, the Indian economy and stock market were both buoyant during 2022 and there are now no concerns about Covid-19. GDP growth should come in around the 7% level in 2022 versus the 2-3% in China. Indian companies are now much more bullish, with people talking about the China Plus One Policy ‘benefiting manufacturing’. There is an abundance of cheap labour and Apple has recently announced plans to manufacture iPhones there.
India has always been a market within Asia where valuations look relatively high but there are several attractively valued companies on a bottom-up basis. It commands a premium price rating due to the quality of its companies and the quality of earnings. India suffered in the aftermath of the global financial crisis and there were multiple scams and corruption issues that have now been addressed. The Modi reform policies are kicking in and the prospects for corporate earnings over the next decade are much more positive than the previous one. India remains well placed to benefit from a long runway of growth due to the under penetration of consumption across many sectors including banking, autos and retail.
Elsewhere in emerging markets, some countries are beneficiaries of higher gas prices such as Qatar, Indonesia, and Malaysia, while in Latin America, some countries have benefitted from stronger commodity prices. Indonesia is resource rich and countries such as Vietnam and Indonesia continue to benefit from Western businesses looking for an alternative supplier to China. Mexico is placed to see a continued economic recovery while the Brazilian stock market, which was a relatively strong performer last year when the market could see an end to monetary tightening, may face a period of uncertainty in the short-term until the economic policies of new President Lula become clear. For Eastern Europe, the continued fall-out of the Ukraine crisis will place a dampener on economic growth until there is resolution.
While the economic outlook globally is clearly challenging, a number of emerging market countries look well placed to deliver longer-term relatively strong growth and have not got the same level of heightened inflationary pressures as in the Western world. Wage pressures in the emerging world have been subdued by an abundance of labour and the ongoing move from an agrarian society to one driven by manufacturing/service industries. Emerging market valuations have never been as stretched as those in the developed world. Similarly, the withdrawal of ultra-loose monetary policy/QE is less of an issue - stagflationary pressures like those being felt in Europe and the UK are not present in emerging countries.
With the relative growth rates likely to improve versus developed markets compared to the previous five years, emerging markets warrant a strategic overweight position in investor portfolios.
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