- Emerging markets (EM) saw broadly positive returns across most countries and sectors.
- Chinese equities continued to lag the broader asset class.
- Technology, especially the semiconductor industry, rallied on strong earnings guidance and the demand outlook for artificial intelligence (AI).
- The strategy underperformed its benchmark due to our Chinese holdings significantly lagging the market and broader asset class.
- We expect the market to reward high quality growth stocks as markets anticipate a slower global economic growth environment – EM ex-China already showing a significant pickup in sentiment and performance.
EM ended the year in positive territory, driven largely by a recovery in the technology sector. Beneficiaries of this recovery included Korea and Taiwan who have several leaders in the space. Strong earnings guidance from AI related companies globally benefitted our semiconductor foundry and memory names.
While EM countries excluding China broadly saw positive or modestly negative returns, China itself remains weak. The market has been hit by negative short-term economic data. Soft manufacturing data has been demonstrated by the Purchasing Managers Index as well as slowing Foreign Direct Investment flows. We have seen general de-risking in the space and outsized/knee-jerk responses to company earnings. Foreign investor sentiment towards China has been further dampened by the prospect of fresh restrictions on AI chip exports to China from the US.
Chart 1. Performance of China and ex-China segments of MSCI Emerging Markets in Q4 2023
Source: MSCI, 31 December 2023. Data in US$.
Chart 2. MSCI Emerging Market Index sector performance Q4 2023
Source: Martin Currie, 31 December 2023. Data in US$.
This quarter had two clear drivers of performance for the portfolio relative to the asset class. The strong recovery in technology (where we are overweight) led to outperformance in the portfolio of technology heavyweights and related economies. The semiconductor industry was particularly additive with holdings such as TSMC, Samsung Electronics, SK Hynix and GlobalWafers outperforming. This was also supportive of the broader ex-China segment of the portfolio holdings in the asset class.
Conversely, the difficulty in China was detracted in relative terms as our holdings were hurt by the disproportionate market response to negative short-term economic data and concerns around economic recovery. This was despite our underweight to China. During the quarter we note that many of our Chinese holdings delivered positively on an operational basis, but still faced negative share price movements. We continue to see positive outlooks for our Chinese holdings and believe that the divergence between operational performance and share price performance will start to close given the fundamental attractiveness of these businesses.
We added one company to our clients’ portfolios:
Proya Cosmetics. Well positioned to benefit from the growth opportunity in the Chinese market. Customer trends towards Chinese brands, greater value-for-money products and increased functionality all provide a strong backdrop for Proya. The company also has an attractive business model – a high proportion of direct-to-consumer sales, significant internal marketing expertise and a strong track record of product development.
We exited one company:
Wuxi Lead. Lowest-conviction idea in the Electric Vehicle (EV) space and we see a risk of earnings downgrades. It may be noted that short-term expectations for the space are already witnessing downgrades, driven by slower-than-expected EV penetration in the US and the EU. Whilst we still believe in the long-term outlook for EVs, this will likely decelerate capacity build-out outside of China. Within China, we see oversupply of batteries and the need to grow into capacity. This is not a beneficial backdrop for Wuxi Lead, with order growth already under pressure.
We are at a unique juncture as we enter 2024, where all five points of fundamentals, valuation, positioning, politics and policy are in positive alignment. This is a powerful combination and we believe it places EM companies and countries in a strong position. They are set to benefit from strong earnings growth, attractive valuation, a supportive fiscal and political environment and the prospect of a potential normalisation in global/EM asset allocations. We are excited as we enter 2024 to see how companies and the market respond to this favourable environment. We have produced a detailed outlook for 2024 which is available on our website – we encourage you to read this. Below we highlight a few key points for why the outlook is bright for the year ahead.
- The return of EM growth stocks:
In an environment of slowing global economic growth and peaking interest rates, growth stocks are well placed to lead the way in 2024. US growth stocks have already begun outperforming, but EM growth stocks have yet to play catch up. In fact, value has now outperformed growth in EM for three consecutive years. We believe this has created attractive valuations for EM growth stocks heading into 2024.
- China – misconceptions create opportunities:
A key drag on EM returns has been the performance of the Chinese market. We feel there are significant misconceptions about China, which in turn is driving material disconnects between share prices and fundamentals. We see signs of geopolitical repair and more domestic shareholder-friendly messaging around private businesses in the country. Accordingly, we think investors will begin to reassess their increasingly cautious approach to China amidst this unprecedented divergence between share prices and fundamentals.
- Structural opportunities – technology and India:
Over the long term, technology has been the best performing sector in EM and represents around a fifth of the MSCI Emerging Market Index. We believe the sector remains a fantastic long-term opportunity. Despite narratives around onshoring, the reality is that the global technology supply chain continues to be heavily reliant on companies within EM countries. These companies are essential for the advancement of global technology, provide investors with a diverse range of opportunities, and are trading at materially lower valuations than US peers.
We believe India is the greatest economic opportunity globally. Seizing its demographic dividend, its time has come. Importantly, there is a rich opportunity set within the country given the presence of companies with long-term structural growth potential and well-regarded management teams. These range from luxury retailers harnessing the power of technology in a market historically reliant on in-person service to retail and corporate banks reaching historically underpenetrated parts of the market using technology and innovative business practices, or global industry-leading materials companies driving positive change in an environmentally lagging sector. We expect these types of companies to continue to ride the wave of the Indian economic opportunity.
The information provided should not be considered a recommendation to purchase or sell any particular strategy / fund / security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
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The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by Martin Currie, within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought.
The information provided should not be considered a recommendation to purchase or sell any particular strategy / fund / security. It should not be assumed that any of the securities discussed here were or will prove to be profitable.
It is not known whether the stocks mentioned will feature in any future portfolios managed by Martin Currie. Any stock examples will represent a small part of a portfolio and are used purely to demonstrate our investment style.
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Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.
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