Re-opening of China to drive EMs in 2023

Oksana Patron

31 January 2023

The re-opening of China after three years of a zero COVID policy will create a strong tailwind for emerging markets (EMs), however a risk of recession in the US would trigger falling demand for EM exports.

According to Maple-Brown Abbott, this will make a combination of these two events, re-opening of China and the performance of the US economy, two dominant themes for global equity markets in 2023.

But at the same time, investors should keep an eye on company valuations as the market will reward companies by marking up valuations, the firm’s Asian equities portfolio manager, Will Main, said.

“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.

He stressed that a key feature of 2022 was the increasing levels of buybacks from corporates across the region and, given depressed valuation levels, this would be an “astute use of capital”.

According to Maple-Brown’s head of global emerging markets, John Moorhead, there would be still volatility following a rise in COVID spikes in China but this volatility would also create investment opportunities.

“Looking further ahead, we expect to see a return in consumer confidence and spending levels,” he said.

However, both managers were in agreement that a US recession would be a drag, causing lower demand for EM market exports and adding a real risk for global equities.

“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,” Main noted.

Moorhead stressed that emerging market central banks were 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,” Moorhead agreed.