Emerging market economies have traditionally been net exporters of goods, and net importers of capital.
And in such a world, the US is always going to play a substantial role, the largest economy in the world with a vast consumerist market, but also, via the dollar, the controller of the world’s reserve currency, and vast quantities of capital.
But the growth of China, as both a consumer of commodities and of consumer goods, may be changing the drivers of emerging market returns.
And China’s equity market itself is around a third of the global emerging market index, so an investor who buys an emerging markets equity tracker fund is also invested in China.
Jonathan Toub, fund manager at Aviva Investors, has had an overweight position to Chinese equities for quite some time, which he describes as a “painful investment”, but has seen it bounce back this year.
He says much of the negativity around Chinese equities, and around wider emerging markets, relates to the statements of policymakers in the country in 2022, which implied a new, less pro-business approach is coming.
But Toub says the rhetoric has not been matched by action, so as investors became aware of this reality, he expects Chinese equities to perform better, and have a beneficial impact on the rest of the asset class.
He adds that it is “hard to get away from the fact” that the economic performance of commodity exporting emerging economies such as Indonesia and Brazil are reliant on Chinese commodity demand.
China is particularly important as a source of commodity demand because its economic growth has, for many years, come through fixed asset investment – that is, building property and other infrastructure, which requires commodities.
Economies such as that of the US generate a much greater proportion of their GDP from consumption than from fixed asset investing, and so are a much less important source of commodity demand.
Damien Buchet, chief investment officer at Finisterre Capital, says: “The likely rebound in Chinese commodity imports will support oil and metals producers from the Middle East to Africa and Latin America.
"Tourism and investment flows will massively accrue to neighbouring Asia, while Central Europe and Mexico will be more distant beneficiaries of the US-China frictions over the medium term, through the re-shoring of key production.”
He says emerging markets are likely, in aggregate, to grow in 2023 by around 4 per cent more than developed markets, and he feels this provides a “cushion” for investors in the asset class, even if the global economic outlook darkens from here.
Arun Sai, senior multi-asset strategist at Pictet Asset Management, elaborates on this further, saying that China has now “reached a level of critical mass” in terms of the size of its economy, that “it is not reliant on the global economic cycle”, and this increasingly means that other emerging economies are becoming less beholden to the global cycle, though he notes the strength of the dollar continues to matter to all other emerging economies.