Imperial Pen Peak of Zhangjiajie

The re-opening of China and the performance of the United States (US) economy will be the two dominant themes for global equity markets in 2023, particularly emerging markets, according to portfolio managers at Maple-Brown Abbott.

John Moorhead, head of global emerging markets, said China and the US will largely dictate how markets will play out for investors over the next 12 months.

“We are optimistic on the outlook for China and believe there is a number of attractive opportunities for investors.

“After close to three years of a zero COVID containment policy, China has now started opening up and this will create a strong tailwind for emerging markets. While we expect to see volatility as COVID cases spike, this volatility will also create investment opportunities. Looking further ahead, we expect to see a return in consumer confidence and spending levels.”

Will Main, Asian equities portfolio manager, added that many investors are still overlooking China.

“Having been in a bear market for the past two years, where China’s equity market fell 63 per cent (at the trough), investor apathy towards the region is high. However, there are strong signs the market has bottomed and, as markets continue to climb, ‘animal spirits’ will take over and investor interest is likely to revive, which will provide further support for the China market.

“One area for investors to keep an eye on is company valuations. One reason for China’s (and the region’s) soft returns over the past decade has been subpar capital allocation. The consequence has been weak earnings per share (EPS) growth (despite decent net income growth) due to higher share issuance. A key feature of 2022 was the increasing levels of buybacks from corporates across the region. Given depressed valuation levels, this is an astute use of capital and we expect the market to reward companies by marking up valuations.

Mr Main and Mr Moorhead agree that the likelihood of a US recession and falling demand for emerging market exports is a real risk for global markets.

“Despite low valuations and generally low levels of current profitability, a recession in the US, or the European Union (EU), would result in weaker top line growth and dent the broader recovery,” Mr Main said.

“Whether the Federal Reserve in the US is still looking at interest rate rises is a big question mark. Asian markets face headwinds in an environment where the USD is strengthening. While it appears that USD strength has peaked, should the US Federal Reserve continue to raise rates above expectations, the region will struggle.”

Mr Moorhead said the question of whether the USD has peaked is key to global emerging markets in 2023.

“Emerging market central banks are ahead of the curve on fighting inflation with many already at positive real rates. If we have seen peak USD, emerging markets could benefit from flows seeking more attractive valuations. 

“However, if the US enters a recession, this will trigger falling demand for EM exports. Emerging market economies have historically been reliant on increasing global trade to grow earnings. A US recession, combined with an already weak Eurozone, would be a drag.

“Overall, however, we believe there is reason to be optimistic about emerging markets. A recovery in growth in emerging markets combined with peak US interest rate increases brings a renewed, positive view towards emerging markets,” Mr Moorhead says.

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