Investors seeking a more reliable source of return should focus more on Asia and EM growth names over the coming months.
In general, EM stocks seem to have performed relatively well against global equities, whose -20.9% fall in the first half of 2022 has marked the worst first calendar half of a year since 1987.
Despite headwinds such as the Ukraine war, lockdowns in China, spiraling inflation and faltering consumer confidence – and subsequent knock-on effects – GDP growth in EM in 2023 is forecast as 4.4% compared with 2.4% in developed markets, according to the IMF.
“For the most part, emerging markets are benefiting from higher private sector savings as well as more tepid recent credit growth, both of which leave the region in a more secure position ahead of potentially more challenging periods ahead,” said Kiran Nandra-Koehrer, head of emerging equities management, Pictet AM.
EM countries also appear less vulnerable from a macro perspective, she explained.
For example, very few suffer from the twin-deficit problem where fiscal expansion combined with credit-fueled booms would once have been the region’s undoing. “If anything, frontier markets appear to be more vulnerable,” Nandra-Koehrer added.
Positive on China
As a standout so far this year within EM, China has been the countercyclical driver. In line with this, Pictet AM is overweight the country.
Following the drag in 2021 from domestic policy, the firm sees China as now delivering on a mix of factors, including a stronger credit impulse and an easing of regulatory policy.
Further, there is a possibility of existing export tariffs levied by the US being removed from Chinese exports based on potential lingering inflation in the US.
“The Chinese growth outlook still remains uncertain, but stimulus measures are being delivered,” said Nandra-Koehrer. “Future infrastructure spending is also anticipated into the second half of the year.”
At the same time, Pictet AM expects a nimbler and more flexible stance towards Covid moving forward.
“We remain comfortable with our overweight positioning to the country, notably within industrials – particularly renewable plays – and consumer discretionary,” added Nandra-Koehrer.
Asia’s bright spots
Pictet AM sees other promising opportunities in the region, including in Indonesia and India.
The former is continuing to perform thanks to its commodity complex trickling down through the economy.
In India, meanwhile, although the firm remains underweight the country – given what it sees as elevated valuations at 20x forward earnings, compared with EM at 11x – it has been adding Indian bank holdings.
There is also optimism across Asia more widely. Headline inflation remains below levels across Europe and the US. Plus, Pictet AM expects pre-existing trends such as the regionalisation of supply chains in Asia to continue, in turn benefiting markets like Vietnam, Indonesia and India.
Further, the region has also already experienced a strong downward trend in negative earnings revisions. “Although this can feel uncomfortable, the benefit is that much more downside risk is now being priced into the asset class,” said Nandra-Koehrer.
