Overview
With developed markets struggling under the burden of inflation levels not seen in decades and recessionary risks increasing, emerging markets equities look well placed in 2023.
As has been the case for much of the last decade China is key to the emerging markets equity outlook. The tight fiscal and monetary policy employed throughout the pandemic, combined with the Zero Covid policy has led to subdued growth and lower confidence in Chinese equities. This has also impacted the perception of the broader emerging markets asset class. Now as 2022 draws to a close, China is finally making the clear policy shift the market had been hoping for with the recent relaxation of certain Covid policies and definitive support for the troubled property sector. China is now in an interesting place, in sharp contrast to many developed markets, with easing policy and the potential for a significant economic rebound as Covid restrictions finally ease.
The divergence of economic cycles is likely to attract investors back to emerging markets. Despite the gloomy global economic environment, emerging market equities look poised to spring to life in 2023.
2022 was a market where we saw some divergent growth in emerging markets. Due to positive impacts from structural factors and policies, both Brazil and India were both strong. Brazil was one of the earliest markets to hike rates and its monetary policy is set to ease over the coming year. India continues to deliver the strongest growth amongst the large economies, fuelled by strong domestic demand. However, not all is rosy in emerging markets. We see some earnings pressure from technology-focused stocks in countries like Korea and Taiwan. Technology supply chains are entering a period of de-stocking, but much of that has already been discounted into their share prices.
In 2022, share prices have responded to what have been significant changes in investment conditions at both country and sector levels. We will enter 2023 with emerging market stocks trading on close to 10x price-to-earnings ratios, well below the average of the past decade. This reflects expectations of slowing global growth as the effects of higher interest rates start to weigh on consumption. Corporate earnings growth is likely to be lower overall in 2023, following a strong recovery from the Covid pandemic in 2021 and 2022, as the commodity boom seen this year is unlikely to be repeated.
Reflecting this, our portfolio positioning has remained broadly unchanged. We continue to find attractive investment opportunities across a broad range of countries and industries. Our investment horizon focuses on the longer term, and we remain excited by the powerful combination of technology adoption, urbanisation and services sector growth that is evident in emerging markets. We expect our highly selective, stock-focused approach will prosper through accessing companies with a high return on equity that operate in structurally growing industries.
Our investment horizon focuses on the longer term, and we remain excited by the powerful combination of technology adoption, urbanisation and services sector growth that is evident in emerging markets.
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Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given.
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 analysis of Environmental, Social and Governance (ESG) factors forms an important part of the investment process and helps inform investment decisions. The strategy do not necessarily target particular sustainability outcomes.
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.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
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