A number of fund management firms explain their outlook for China and emerging markets more broadly. It appears that several investment houses think China's potential for a resurgence hasn't been sufficiently priced in. However, some are more cautious.

China's market hasn't received much love this year but there are plenty of ways to profit as the country recovers, fund managers argue. 

Mark Williams, portfolio manager of Somerset Capital Management Asia Income Fund and Emerging Markets Dividend Growth Fund, thinks that the world’s least loved market is a hunting ground for lucrative investments. 

“There is a host of attractive opportunities in the world’s least loved market despite the largely self-inflicted impact of Covid-policies and additional geopolitical noise,” Williams said in a statement this week.

Certainly, the financial data reveals that China has catching up to do. The MSCI China Index shows total returns of 4 per cent (capital growth and reinvested dividends). By contrast, the MSCI World Index of developed countries shares shows returns of 10.22 per cent. 

Williams, reckons that China, still ranked as an emerging market, benefits from that status: “China is simply in a better economic position than developed economies. Unlike the situation in the West, deflation has now become a greater risk than inflation given the tight grip the Chinese government has over its rates during this cycle.”

“China’s economy was weaker for longer due to Covid-19, not least due to its zero-Covid policy, but we are now seeing it bounce back. Flight bookings, cinema ticket sales and restaurant reservations are all on a trajectory back towards pre-Covid levels, indicating that domestic consumers are gradually shaking off the lockdown psychology to spur certain areas of economic growth,” he said. “Little of this, however, has yet been priced in at an equity level, and Chinese stocks are continuing to trade at larger discounts to Western markets than what has been seen for the best part of 20 years. There are businesses with strong fundamentals that are currently extremely undervalued,” he added. 

“Approaching China’s discounted yet hugely promising equity market with selectivity and strong awareness of regulation is key to getting stock selection right, and we expect well-managed, growth businesses to drive significant returns going forward,” he continued.

Hidden gems
Williams isn't alone in holding an optimistic view of China. Ronald Chan, founder and CIO of Chartwell Capital, an investment firm based in Hong Kong, also thinks there are hidden gems to be found in the country, for instance in healthcare, even though markets fell recently and there are concerns that the economy is slowing. “This provides a good opportunity to jump back into the market when things are cheap,” he said. See more here.

Andy Rothman, investment strategist at US-based Matthews Asia, also thinks that the consensus view of the Chinese economy may be unduly gloomy. See his recent viewpoint stated here.

Not everyone is so upbeat, however. The portfolio of UK-based investment management firm Hosking Partners is underweight in China, reflecting a cautious approach, due to geopolitical uncertainty in the region combined with a distorted supply-side market environment. The firm thinks that the tense China-Taiwan-US relationship could produce a range of scenarios up to and including nuclear war. The strategic uncertainty implicit in the Taiwan problem – combined with the misallocation of capital – leads to its underweight position.

Cracks are emerging in the Chinese economy – particularly in real estate – and macroeconomic concerns centred on population decline are growing in prominence, the firm said in a statement. The firm has some direct exposure to Chinese companies mostly in the online retail sector and some exposure to South-East Asia more broadly, with a keen interest in the semiconductor industry.

Asian Opportunities
Somerset Capital's Williams thinks that demand for swifter and better computing power has opened up a wealth of opportunities across the board in Asia. “We’ve seen a huge boost in technology companies over the past 12 months, as expectations rise that AI will be a significant part of our lives in the future. While the direct impact is hard to predict, the first step is to build the computing power that AI requires. This shift has opened up a wealth of opportunities in Asia, where the tech boom is very much alive and kicking,” he said.

“We are seeing attractive investment opportunities in China, Taiwan and South Korea across the technology sector, from memory and storage providers to server ODMs. The sector is extraordinarily diverse with companies operating in niche sub-sectors that are vital to tech development, and we expect these opportunities to offer significant upside in the long term,” he added.

Emerging markets bouncing back as developed economies struggle with inflation
“Unlike the periods of ultra-low interest rates that caused global equity valuations to soar after the 2008 crisis, companies with low immediate earnings but high growth potential have seen their valuations plummet as a result of the current rate environment, demonstrating that the rising cost of capital has a very real impact,” Williams said. “Governments in highly leveraged developed economies like the US and UK are facing similar pressures, while Asian economies are better placed given lower levels of government debt,” he continued.

“This, combined with less inflationary pressure and positive real interest rates, means there are attractive investment opportunities in companies that are well managed, understand the cost of capital and boast self-funded growth,” he concluded.