By John Malloy, Redwheel Co-Head of Emerging and Frontier Markets
At the beginning of 2023, the narrative that dominated global markets was clear. Many investors believed that the US would head into a recession while China would see a reopening boom driven by revenge spending. Neither happened and the consensus changed its mind.
Many investors now believe that China is the new Japan and is destined for structural stagflation. On the other hand, the US is an economic phenomenon that is expected to remain resilient throughout the hiking cycle. As a result, the perception was that weak growth in China would spill over to other emerging markets and the commodity complex, while a strong dollar would put additional pressure on Emerging Markets and so on.
However, we believe the fundamental case for Emerging Markets is still intact and consensus will change its mind once again.
As we enter 2024, the conditions for an Emerging Market recovery continue to surface. In China, the initial signs of an upturn are evident, though the market is waiting for additional policy support.
Rates in the US appear to have peaked, with the US Federal Reserve now signalling rate cuts this year. We expect this to lead to a reversal in the US dollar's strength, which bodes well for Emerging Market performance. Meanwhile, a reducing supply surplus in semiconductors may benefit key technology-exporting markets such as Taiwan and South Korea.
The real GDP growth differential between Emerging and Developed Markets continued to accelerate throughout 2023. Commodity demand, which is beneficial to many Emerging Market countries, should be driven by numerous factors such as reshoring, defence spending and the energy transition. We believe capex growth is likely to trend higher as investor priorities shift towards spending on defence and reshoring, which will drive demand for materials.
Net-zero targets and sustainable energy product growth around the world are drivers of the energy transition. This should drive demand for green metals that are powering the energy transition such as copper.
Emerging Market central banks raised rates well before their developed markets counterparts, remaining ahead of the curve. Entering 2024, this leaves room for increased rate cuts.
Valuations in India, which has been a key performer for Emerging Markets, are now stretched and we may see a correction in 2024.
By Colin Liang, Portfolio Manager
The Chinese economy was expected to rebound quickly in 2023 and resume its role as the engine of global growth. Instead, it stalled to the point where it was being called a “drag” on global output. After a clear pivot from Covid lockdowns, the Chinese economy was faced with a challenging property sector, struggling employment market and plunging exports which obstructed a highly anticipated recovery. This led to China’s economic growth being the slowest in a decade. The Chinese equity market therefore went from a risk-on scenario to risk-off during the year, with a <20% fall in MSCI China index over 2023.
The table below details what happened in 2023 and our outlook for 2024.
We are optimistic that China can achieve 5% GDP growth in 2024 on the back of continuous supporting measures. We believe Chinese corporates' earnings should see growth accelerate to mid-teens from c.9% in the past year. The growth will be contributed by a stabilisation in economic growth, completion of the destocking cycle and continuous cost-down efforts by corporates. Index FY24 price to earning ratio is below 9x, a 35% discount to the MSCI Emerging market index. It is the widest discount between the two indices in two decades. China’s equity risk premium has recently climbed to over 6%, reflecting attractive valuations. Active exposure in China is extremely light, with historically low valuations, we view China equities as offering meaningful upside with limited downside. It does require some catalysts to unlock its upside potential, events such as a more benign geopolitical backdrop, further stimulus policies on the property sector and more fiscal expansion from the central government could aid the momentum.
Sources
Important Information
Unless otherwise stated, all opinions in this article are those of the Redwheel Global Emerging and Frontier Markets team as at February 2024. This article does not constitute investment advice and the information shown is for illustrative purposes only.
The Responsible Entity and issuer of units in CC Redwheel Global Emerging Markets Fund ARSN 630 341 249 and CC Redwheel China Equity Fund ARSN 656 117 421 (the Funds) is Channel Investment Management Limited ACN 163 234 240 AFSL 439007 (CIML). The CC Redwheel Global Emerging Markets Fund invests into Class F Shares in the Redwheel Global Emerging Markets Fund (Underlying Fund) which is a sub-fund of the Redwheel Funds, an open-ended collective investment company domiciled in Luxembourg. The Investment Manager of the Underlying Fund is RWC Asset Advisors (US) LLC (Redwheel). This email (including attachments) is subject to copyright, is only intended for the addressee/s, and may contain confidential information. Unauthorised use, copying, or distribution of any part of this email is prohibited. Any use by unintended recipients is expressly prohibited. To the extent permitted, all liability is disclaimed for any loss or damage incurred by any person relying on the information in this email. While every effort has been made to verify the data in the attached report, neither CIML nor Redwheel warrant the accuracy, reliability or completeness of the information nor do they guarantee the repayment of capital, the performance of the Funds or any particular rate of return. Past performance is not an indicator of future performance. The prices of investments and income from them may fall as well as rise and an investor’s investment is subject to potential loss, in whole or in part. This communication has been prepared for the purposes of providing general information, without taking into account any particular investment objectives, financial situation or needs. The Responsible Entity has issued offer documents for the Funds which contain important information and are available here. An investor should, before making any decision to acquire, or continue to hold an investment in the Funds, read and consider the PDS and any updated information and seek professional advice, having regard to the investor’s objectives, financial situation and needs. A Target Market Determination for the Funds is available here.
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