Dijana Jelic, EM Equity Product Specialist, looks at China’s challenges in recent years, the potential for strong near-term performance and the expanding opportunity set across emerging markets:
- The Chinese equity market has significantly underperformed the emerging markets (“EM”) equities asset class in recent years. This is due primarily to concerns regarding its long-term growth trajectory, given challenges relating to the four “Ds” of debt, deflation, decoupling, and demographics.
- While structural issues do exist, we believe the potential for strong near-term performance from China should not be underestimated, given extremely low valuations and increasingly supportive government policy.
- One outcome of China’s weakness in recent years is that the composition of the EM Equity index has become more diversified, with China’s weight falling from 44% in 2020 to 25% today1. We have also seen the market cap of the next seven largest EM benchmark countries outpace that of China and Hong Kong. We expect this trend to continue, which should improve the attractiveness of the overall asset class.
- China’s decline has also sparked growing interest in EM ex-China equities. While there are question marks on China’s structural outlook, the investment case for many EM countries is strong.
1 MSCI