Portfolio manager suggests EM darling may have to cede some ground to other regions
China has become used to hogging the headlines when it comes to emerging markets. The sheer size of its economy married with the country’s impressive recovery from the pandemic has made it a favourite for investors looking beyond the Western world.
Despite its unquestionable standing among EM contemporaries, Regina Chi, VP and portfolio manager at AGF Investments, an Employer of Choice award winner at the 2020 WP Awards, posed the vital question: what happens next?
She said: “Unlike the on-again, off-again rebound in Western economies, its recovery has been truly V-shaped, with only minor resurgences in COVID cases and containment measures since the height of the pandemic in early 2020. Now, that recovery seems complete.
“In fact, China is likely to come in as the only major economy in the world to have grown at all in 2020, albeit at a modest, by China’s standards, 2.3%, according to estimates. Meanwhile, the defeat in the U.S. presidential election of Donald Trump, who toed a hard line against China for the past four years, seems to augur well for more sunny days ahead.”
However, there’s a “but” coming. Chi believes that future China stock returns might be moving into a more modest period. Indeed, it might be time for investors to begin looking elsewhere for opportunities in emerging markets (EM) – especially India.
She questioned how much further China equities can climb, explaining that over the past 12 months the China index has risen 46%, while the broader EM index has returned a still-remarkable 28% and the S&P 500 “only” 17%. She said: “Is that sustainable? Maybe. Yet we suspect that the good news on COVID and whatever optimism is justified on the trade front have been largely priced into the market.”
As well as doubts that there will a thawing in the political relations between China and the U.S., Chi expected the headwinds to linger, potentially capping the upside of Chinese equities.
In contrast, she sees “significant potential” for India’s economy and its equities. While the MSCI India Index has performed strongly over the past 12 months, rising about 21%, structural reforms under Prime Minister Narendra Modi are poised to bear fruit, she insisted.
The country’s "Make in India 2.0" initiative, a reboot of its original five-year plan to transform the country into a global manufacturing and design hub, new labour codes that make doing business easier, a promising pharmaceutical sector, and this year’s FY22 Union Budget that focused on growth and increasing transparency, all bode well.
Chi said: “In advancing a case for India, we are not suggesting that the rally in China stocks has definitively run its course; we are merely suggesting that the days of China as an investor’s emerging-market darling might be numbered. Even if they are not, its volatile stock-market history argues for diversification. In our view, therefore, investors should consider looking beyond China to seek upside and hedge risk in their emerging-market equity allocations. India is a good place to start.”
