With valuations currently sitting at multi-decade lows, the head of equities, Asia Pacific, at Fidelity International has suggested that investors should not overlook a potentially “opportune moment” to gain exposure to Asian emerging market equities.
According to Marty Dropkin, China is now set re-emerge as a key driver of Asian emerging market growth, which he noted had been “a little lacklustre” partly due to the uneven distribution of China’s recovery as well as slower growth than investors had anticipated.
“However, China’s recent Politburo meeting signalled broad support for the property sector and boosting consumer spending,” Mr Dropkin said.
“Combined with the nation’s higher commodity prices, stronger fiscal positions, continuing easy monetary policy, and a weaker US dollar, we continue to see significant upside for the broader Asian economies over the medium term.”
Mr Dropkin cited forecasts by the International Monetary Fund (IMF) that show Asia is expected to account for 70 per cent of global growth this year. He predicted that China will play a central role in driving this growth within the region.
“Although the economic recovery in China itself may not follow a linear trajectory, we do broadly see much greater resilience among emerging market economies than in previous cycles,” Mr Dropkin noted.
“The fiscal positions of emerging market countries have strengthened since the 2013 taper tantrum, with better current account balances, less dollar-denominated debt, and more significant foreign exchange reserves.”
In terms of specific opportunities in the region, Mr Dropkin pointed to supply chain decoupling and the ongoing trends of ‘nearshoring’ and ‘friendshoring’ among global companies.
“The China +1 strategy is a key dynamic, as developed-market companies spread out production to other countries with low-wage, high-skilled economies,” he explained.
“This trend is also driving greater dispersion in returns among emerging economies. Countries such as India, Indonesia, and Vietnam will particularly benefit.”
Mr Dropkin also suggested that, in an environment of higher commodity prices and interest rates, innovative companies in the technology, media, entertainment, and consumer discretionary sectors, as well as commodity and financial businesses, were well placed.
“We see a number of positive short and medium-term drivers for emerging market equities, with positive macroeconomic tailwinds, a more robust commodity price environment, and an improved fiscal backdrop,” said Mr Dropkin.
“Given that current valuations are at trough levels and seemingly out of sync with the improved fundamental environment, we think a particularly attractive entry point exists today for the Asian emerging market equity asset class.”
