Fund managers are returning to emerging market stocks as China emerges from its “draconian” zero Covid policy and inflation continues to put pressure on developed economies.
Despite marginal falls in inflation in December for the UK and the US of 0.2 per cent and 0.6 per cent respectively, relative high rates prevail which Rob Brewis, investment manager at Aubrey Capital Management, says is not true of emerging markets.
“It is worth clarifying the emerging market [inflationary] experience. Most emerging markets did not have near zero inflation, nor zero rates going into this period. So, while inflation and subsequently interest rates have risen, the magnitude of these rises has been much less dramatic than in the US and Europe.”
Brewis cites India, Mexico and frontier market Vietnam where inflation has been “on a long and downward trend”.
“This may have been temporarily interrupted, but the downtrend remains largely intact. Long term structural downtrends in inflation are usually good for equities,” Brewis says.
John Wyn-Evans, head of investment strategy at Investec Wealth & Investment, also likes the outlook for emerging market equities thanks to “sensible monetary and fiscal policy which he says saw many EM countries fend off the worst effects of global inflation in the last year”.
“There is plenty of ammunition to provide renewed stimulus to growth. Valuations are relatively attractive, too,” he says.
Research from Managing Partners Group covering 100 professional investors across Switzerland, Germany, Italy, and the UK published this month, demonstrates a growing appetite for emerging markets, with 46 per cent expecting to increase their allocations in the next two years.
Jeremy Leach, chief executive officer of Managing Partners Group, says: “In the face of rising inflation and an economic downturn, investors are doing everything they can in the search for yield including increasing their appetite for risk through investing in equities.”
Emerging market performance from the start of this year will likely attract yet more investor attention, with equity returns easily exceeding those from their US counterparts.
The MSCI Emerging Markets index has returned 7.79 per cent in the month to 17 January, while the US returned 4.09 per cent.
The Chinese markets have fared even better with returns of 11.17 per cent over the same period.
The prospects for the Chinese stock market look promising this year after the lockdown measures which Brewis says “sucked the life out of the Chinese economy” are abandoned in favour of a more relaxed approach.
“We invest in the Chinese consumer: will he/she be released to spend the massive savings hoarded up in the past few years? We believe so, and this will be a much more favourable backdrop for our consumer companies who are now very cheaply valued,” Brewis says.
