Why emerging markets are an attractive opportunity 

As we enter the year of the rabbit – a symbol of longevity, peace and prosperity – a new chapter could be opening. 

It is also necessary to pay particular attention to a company’s profitability and cash generation, level of indebtedness and ability to self-finance growth. We focus on stocks that have a capital light business model, low gearing ratio, solid free cash flow, are friendly to minority shareholders and exhibit good corporate governance.

On the contrary, we try to avoid inefficient state-owned enterprises that have spent years mis-allocating capital, with past controversy, corporate governance issues and bad ESG ratings.

A spotlight on China 

With a market capitalisation of more than $19tn (£15.6tn), second only to the US, and more than 6,000 listed companies, the combined Chinese markets (A-shares, H-shares, ADRs, S-shares) cannot be overlooked by investors today. Yet, despite its size and momentum, China is still under-represented in some investors’ allocations and in global equity indices. 

In 2022, China's financial markets experienced a period of high volatility. This was due to regulatory developments, geopolitical tensions and an economic slowdown resulting from a draconian zero-Covid policy all of which reduced its appeal to international investors.

But, as we enter the year of the rabbit – a symbol of longevity, peace and prosperity – a new chapter could be opening. 

Chinese markets can be an effective portfolio diversifier in terms of geographic exposure.

China has scrapped its zero-Covid policy, and the Public Company Accounting Oversight Board has secured complete access to inspect and investigate Chinese firms for the first time.

Thus, the earlier-than-expected reopening of the country, the continued easing of Chinese policy measures and the government’s clear policy shift towards the economy should support Chinese growth. In fact, we expect  China to be the only major economy where economic growth is accelerating in 2023. 

In addition, we see favourable earnings momentum. Unlike in the US, where earnings are expected to be weak, many Chinese companies will most likely experience a rebound. Most Chinese firms have cut costs over the past three years and we expect that the top-line growth will drive the earnings recovery in 2023. 

Chinese markets can be an effective portfolio diversifier in terms of geographic exposure, given their low correlation (especially the domestic A-share market) with other equity markets.

However, risk management is essential as there are some factors that investors should monitor (Covid case resurgence or geopolitical developments, for example). We believe that many of these factors can be mitigated through active portfolio management. 

One needs to think differently by looking at the future rather than the present.