STEALTH: Emerging Markets (EM) has been the perennial laggard of global stock markets for years. Much of this has been driven by the growing size, and underperformance, of China (see chart). It has a huge 30% weight in EM indices, and suffered as its GDP growth slowed and it cracked down on its property and tech sectors. This has masked the better performance from other EM’s. Emerging Markets ex China stocks are up 13% this year, double the broader index, and versus China’s 3% fall. Whilst EM’s Greece, Czech, Hungary, and Mexico are the world’s best performing markets. We see EM stocks as a deep-value contrarian play on a weaker dollar, improving tech cycle, and firming China growth. From @ChinaTech to @LatAmEconomy.
EX-CHINA: The 23 markets in emerging markets ex China are dominated by Asia’s Taiwan, India, and Korea, plus Brazil, and Saudi Arabia. They are near 75% of the index. It’s an eclectic mix with a strong exposure to tech (one-third of the index), banks (a quarter), and commodities (15%). By its nature emerging markets almost always includes both the world’s best and worst performers. This year is no exception, with Greece up 50% whilst neighbour Turkey is down 15%.
EM: We see the broader EM asset class, including China, as an attractive contrarian investment. It will benefit from peaked US interest rates, a weaker US dollar, improving tech cycle, and China’s counter-cyclical economic growth pickup. Many are close to cutting interest rates, having hiked earlier and with inflation now lower. Together this is driving the highest GDP growth premium versus developed markets in nearly a decade, at 2.6pp per the IMF. This is fuelling forecasts for a big 18% earnings rebound next year. Whilst EM’s 12x forward P/E valuation is at a 30% discount to global equities, unloved after a decade of underperformance.
All data, figures & charts are valid as of 20/07/2023.