China: rebalancing continues to offer investment opportunities
Looking across emerging markets, the Chinese economy continues to face many structural challenges, but we believe they will result in lower medium-term economic growth, accompanied by some volatility, rather than pose crisis risks. China has remained resilient at the macro level.
The rebalancing of the economic structure toward services should continue to provide investment opportunities, especially within sectors such as e-commerce, e-payments, social media, education and insurance. For the next few years, we expect China to focus on the quality of growth and to continue its reforms agenda including corporate deleveraging and environmental improvements.
India remains an attractive long-term story
In India, corporate earnings are beginning to improve but only gradually. While we currently see attractive bottom-up opportunities, we are also monitoring the macro risks, such as the widening trade and current account deficit.
In the nearer term, the government’s focus on infrastructure spending continues to boost domestic sentiment. There should also be further fiscal support in the run up to 2019 national elections, especially for the rural economy. The consumer remains somewhat robust and household sentiment has improved from last year.
We see India as an attractive long-term story and believe that the Modi government will continue to focus on removing bottlenecks and pushing through calibrated reforms to revive investments for sustained growth in the medium term.
Outside Asia—contagion risks and political uncertainties overshadowing economic improvement
We see limited contagion risks from Argentina and Turkey woes, which we believed are already reflected in currencies that have weakened against the USD, and inexpensive valuations. The situation is also quite different for many countries, primarily commodity producers, as commodity prices are currently strong despite the stronger USD, which should offer some buffer and offset the potential economic impact of tighter financial conditions.
Overall, while we don’t view the upcycle as broken, risk perception has risen and we expect heightened stock price volatility going forward. We thus encourage investors to look through the noise and focus on long-term fundamentals and the continued economic recovery. Our analysis shows large opportunities exist in various sectors, including consumer, internet/e-commerce, and financials. While there are some small vulnerable spots in EM, we are mindful of these risks and have very limited exposures to these areas.