Will China’s stimulus boost the economy?
The Chinese government’s policy announcements suggest a positive direction, but we expect the economic recovery will take time given significant structural issues, like the real-estate crisis. For context, excess real-estate inventory amounts to 20 trillion renminbi, dwarfing recent policy support of 300 billion renminbi.1
The Chinese economy is currently experiencing deflation, and the government is working to improve consumer confidence. Several monetary measures have been implemented to boost consumption; these are positive steps, but in small doses. For instance, the help with mortgage repricing is insufficient to significantly improve household confidence. The 50 basis-point cut in outstanding mortgage rates could save households 150 billion renminbi in interest expenses annually, equivalent to just 0.3% of annual retail sales.2
We recently conducted an online survey across China.3 Among the respondents, 70% were employed, aged between 26 to 46, with middle income levels. When asked which event would be most likely to drive higher discretionary spending, 25% preferred a cash handout from the government, followed by subsidies for elderly care. More direct support to families is needed in China, but this has not yet been a primary focus of government policy.
Will the US Federal Reserve deliver a soft landing? How will global interest rates and monetary policy affect emerging markets?
The US economy shows resilience, which supports the possibility of a soft-landing scenario. Emerging markets are sensitive to US-dollar strength, and the possibility of lower rates and a weaker dollar could support higher capital flows into emerging markets.
US election result: what does it mean for emerging markets?
In 2024, we saw elections across key emerging markets as well as in the US. While the details of President-elect Donald Trump’s proposed new policies are unclear, tariffs and geopolitical tensions are likely to remain significant concerns. US-dollar strength is crucial for emerging markets as it affects flows. The outlook for the US dollar is mixed; a higher deficit may drive stronger rates and a stronger US dollar, but increased manufacturing competitiveness in the US requires a weaker dollar.
Emerging-market companies have been navigating similar environments of higher tariffs and tensions in recent years. Over the last decade, emerging markets have faced challenges, but we now see supply-chain diversification and innovation supporting domestic economies and global exports with stronger balance sheets and lower valuations.
Our focus is on a select group of well-priced compounding businesses in emerging markets which can benefit from the growth of domestic economies. We believe our preferred holdings have strong return potential and long growth runways.
What is the impact of the oil price on emerging markets?
The impact of rising oil prices depends on whether countries or regions are net importers or exporters. Asia, a net importer, is vulnerable to higher costs, inflation, and weaker currencies. However, tariffs, trade tensions, and President-elect Trump’s oil policies may help lower oil prices.
If debt-ridden Western countries rein back on their promises about sustainability goals, how will this affect emerging markets?
A reduction in commitments to sustainability could adversely affect emerging markets in several ways. These include impacts on exports, incremental investments, and the ability to drive positive change across emerging-market countries.
China supplies over 65% of the world’s renewable energy products, including solar panels and batteries.4 Reduced sustainability commitments from Western countries would pressure China’s green industry exports. Western countries’ dedication to sustainability has driven innovation and new investments in emerging markets, like foreign direct investment into Indonesia related to green energy. Furthermore, demands from clients in Western countries have pressured emerging markets to enhance their commitment to sustainability goals and targets. A rollback in Western commitments could reduce this pressure, ultimately having a negative impact on the global environment.
Where do you see the most interesting opportunities?
We see compelling opportunities in companies driving the digitalization of economies.
Several emerging-market companies are global leaders in driving transformation, particularly in artificial intelligence (AI). The valuations of emerging-market technology enablers lag developed-market technology sectors. AI is evolving globally and is expected to reshape numerous industries, including health care, media, and industrials. The global AI market is projected to grow from $86.9 billion in 2022 to $407 billion by 2027, representing a 36.2% annual growth rate.5 Leading US technology companies are set to invest hundreds of billions annually in building data centers to support the rise of AI. While AI processing chipmakers dominate headlines, high-bandwidth memory (HBM) is also crucial, with a Korean business leading in HBM manufacturing technology. Testing companies are vital for improving semiconductor yield and efficiency, and we see attractive prospects in two Taiwanese firms.
Consumer experiences are gaining market share in China and India. We currently have exposure to an Indian online travel operator deriving 30% of its revenue from air travel and 50% from hotels. Its growth is driven by increasing penetration, which remains low, and higher frequency of use. Online hotel booking penetration is growing from 20% towards the global average of 60% to 70%.
Sources:
1. South China Morning Post, China needs to inject US$276 billion into property market to stabilize prices: Goldman Sachs, June 4, 2024. https://www.scmp.com/business/china-business/article/3265371/china-needs-inject-us276-billion-property-market-stabilise-prices-goldman-sachs
2. Global Times, China’s central bank cuts existing mortgage rates to prop up housing market, stimulate economic growth, September 24, 2024. https://www.globaltimes.cn/page/202409/1320268.shtml
3. Newton and Baidu, October 2024.
4. Chartered Institute of Exports and International Trade, Chinese green tech exports grow to majority of world supply as global renewables shift slows, May 30, 2024.
5. GlobalNewswire, Artificial Intelligence Market Worth $407.0 Billion By 2027, Growing At A CAGR Of 36.2%: Report By MarketsandMarkets, May 17, 2023. https://www.globenewswire.com/news-release/2023/05/17/2671170/0/en/Artificial-Intelligence-Market-Worth-407-0-Billion-By-2027-Growing-At-A-CAGR-Of-36-2-Report-By-MarketsandMarkets.html
Authors
Liliana Castillo Dearth
Head of emerging markets and Asia equities
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