Maple-Brown Abbott has pointed to China’s reopening from the pandemic and the US economy’s performance as the two dominant themes for global equity markets this year.
On the outlook for China following the end of the country’s strict lockdown restrictions, Maple-Brown Abbott head of global emerging markets John Moorhead said that the firm is optimistic and believes there are a number of attractive opportunities available for investors.
“After close to three years of a zero COVID containment policy, China has now started opening up, and this will create a strong tailwind for emerging markets,” he said.
“While we expect to see volatility as COVID cases spike, this volatility will also create investment opportunities. Looking further ahead, we expect to see a return in consumer confidence and spending levels.”
But according to Will Main, Maple-Brown Abbott Asian equities portfolio manager, many investors are still overlooking China. Investor apathy remains high following the bear market of the past two years, during which China’s equity market dropped by as much as 63 per cent.
“However, there are strong signs the market has bottomed and, as markets continue to climb, ‘animal spirits’ will take over and investor interest is likely to revive, which will provide further support for the China market,” said Mr Main.
He suggested that investors should be keeping an eye on company valuations. Subpar capital allocation, Mr Main said, is one reason China’s returns have been soft over the past decade.
“The consequence has been weak earnings per share (EPS) growth (despite decent net income growth) due to higher share issuance,” he added.
“A key feature of 2022 was the increasing levels of buybacks from corporates across the region. Given depressed valuation levels, this is an astute use of capital, and we expect the market to reward companies by marking up valuations.”
Turning to the US outlook, Mr Moorhead and Mr Main agreed that the likelihood of a recession and falling demand for emerging market exports present a real risk for global markets.
“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,” Mr Main warned.
“Whether the Federal Reserve in the US is still looking at interest rate rises is a big question mark. Asian markets face headwinds in an environment where the USD is strengthening. While it appears that USD strength has peaked, should the US Federal Reserve continue to raise rates above expectations, the region will struggle.”
As for the outlook for emerging markets, Mr Moorhead said that they could stand to benefit from flows seeking more attractive valuations if the USD has indeed peaked.
“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,” he concluded.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
