Despite some investors voicing concerns about overheating in China, the country is one of the most promising emerging markets – along with Chile and Malaysia – and should enhance the risk/return profile of most portfolios, says Collins Stewart, which is overweight Chinese equities .

Emerging markets have returned around 90 per cent in local currency terms since their 2008 trough, according to the wealth management firm, which says their dramatic fall and recovery was about beta rather than fair value (as EMs tend to be more volatile than developed equity markets).

However, these returns are unlikely to continue hereon in, says CSWM: to get the best returns it will be important for asset allocators to consider the country they invest in. 

At this stage, stock market fundamentals are once again becoming the most important factor in performance, and the emerging markets most likely to outperform are those which will have the best earnings revisions.

“In our eyes, the stand out markets in this cycle will likely be China, Malaysia and Chile. Not only do these markets thrive on staunch economic foundations, they have demonstrated either lower volatility and/or correlation with developed markets,” says CSWM.

China A-shares have a 4 per cent correlation with the S&P 500, a gauge of the US large cap equity market; therefore, accessing the country requires a lower proportion of one’s risk budget relative to other EMs, says Collins Stewart.

With regard to the Chinese economy, while the latest export data shows recovering global trade, the most compelling story is about domestic demand growth. According to Collins Stewart, officials in China have indicated that the five-year plan will promote consumption.

Meanwhile, it says the economy is already more consumer-driven than is perceived. Gross exports in China calculated as a percentage of nominal GDP average just 27 per cent over the last ten years, compared with figures of 96 per cent for Malaysia and 33 per cent for Germany, according to figures from Collins Stewart. Added to this is the huge stock of household savings, the rise in state welfare expenditure, and expected currency appreciation; consequently the firm expects to see this consumer trend boosted considerably.