We believe that Asian and Emerging market equities may well outperform over the next 12 months due to several key factors:
China - Recent market falls have largely resulted from a slump in stock valuations (Price/Earnings multiples) due to overcapacity and price reductions being offered to export goods, as the domestic market cannot absorb this level of production. We think that China will continue to focus on economic rebalancing towards a consumption led economy which will involve moving credit to private companies away from state owned enterprises.
- After slowing in Q2 we see economic momentum looking to stabilise. Consumer spending has increased along with service sector activity, and this has offset declines in investment and industrial production. Government support is also ramping up which should give hold to a modest recovery over the coming few months. Expanding fiscal support should prop up domestic demand
- The service sector is now around 70% larger than the industrial sector.
- Improved earnings per share should help reverse the share price declines.
Strong Domestic Demand in India - India continues to exhibit robust economic growth, driven by strong domestic demand meaning we expect to see continued economic growth and stability. This will support continued GDP growth, along with access to cheap energy over the coming years.
- The favourable demographics, urbanisation and expanding middle class will also ensure this trend may well continue. Housing demand we expect to increase which will support multiple supply industries as well.
- The digital revolution, not least in banking, will ensure that more people & businesses are able to consume more goods moving forward.
Attractive Valuations and Earnings per Share growth in 2024 (see charts below) - Emerging market equities are currently trading at attractive valuations, with price-to-earnings ratios well below the average of the past decade and consensus for improving earnings per share. This gives us a view on potential improvements to share prices over the coming months.
Source: JP Morgan
Access to cheap energy - Cheap energy has helped fuel domestic GDP growth in regions and we think Asia now has secured these cheaper energy sources, through renewables and also through cheaper Russian Hydrocarbons. With no other major market able to take the quantity that they consume we think this trend will continue for many years to come.
- India has achieved near universal energy access through cheaper energy programmes.
Technological Advancements - Asian markets, particularly South Korea and Taiwan, are home to leading technology companies. With AI related products in strong demand this will feed through allowing outperformance of these regions.
Urbanisation and Services Sector Growth - The continued urbanization and expansion of the services sector in emerging markets are key drivers of long-term growth. These structural changes help support the view that longer term growth is coming from this region, rather than continuing to come from large cap US equities.
Asset Return Expectations (2024)
Bowmore Portfolios
We currently hold a very underweight position to China and the emerging markets overall. Why is this with all the positive areas covered above? The main reason is the fact that until recently Trump has looked very likely to return to the White House. Under this scenario we always felt that round 2 of Chinese / US tariffs would have a greater impact than the first where currency devaluation softened the blow. Given this scenario now seems to be changing it is important we look at what this region might do with rhetoric that might not be so damaging and that would support continuing the Ukraine situation and hence keeping Russia as it is currently.
The growth rates in these areas and the weakness of China mean that we feel some real opportunities exist and whilst we will not try to call the US election we must be prepared to move quickly if the result is not as the market expected just a few months ago. Our overweight position to India continues to be a benefit but we are cognisant that other opportunities are looking more attractive now that we may move towards a declining US dollar combined with the above.
