Asia and emerging markets sector review – China and Brazil in the spotlight

In a tumultuous year for global markets, we look at how different Asian and emerging stock markets have fared in our latest sector review. We also consider the prospects for China, following the re-election of Xi Jinping as President and recent party congress.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice.

China consolidates power

China’s latest political congress has left investors uncertain about the prospects for the world’s second largest economy.

President Xi Jinping has continued his leadership after being re-elected as head of the ruling Communist party in October. Xi first took power in 2012 and was awarded a third five-year term as party leader, overruling previous custom to serve for a maximum of ten years.

While it was no surprise Xi Jinping would break convention and take a third term as party leader, his appointment of loyalists, and removal of rivals, from the party’s inner circle came more of a shock. The new seven-member Politburo Standing Committee, the country’s most powerful decision-making body, now consists of close associates and does little to hide Xi’s plan to consolidate his power.

The heightened presence of Xi’s allies could indicate a lack of checks and balances inside the government. However, we’ve already seen Xi work on consolidating his power over the past decade, so from this perspective it’s perhaps not a huge surprise.

While growth remains a priority for Xi’s government, this has shifted to an overall focus on ‘development’ incorporating growth, as well as national security and common prosperity. Self-reliance is an increasingly important theme and it’s likely we’ll see China focus on developing its own manufacturing and technological prowess.

Tensions between the US and China remain rife and are likely to present further implications for economies globally. Any attempt to ‘decouple’ completely will be difficult given the impact on businesses and difficulty in unwinding supply chains. An invasion of Taiwan remains unlikely given Xi has seen the realities of this action and potential retaliation from the West, but as ever can’t be ruled out.

The uncertainty means Chinese share prices could remain under pressure in the near term and at least until the dust settles or there’s a clear catalyst for recovery, like Covid restrictions lifting.

China’s zero-Covid policy has continued to weigh on growth and business activity. Valuations and sentiment are low, so this could present an opportunity for those prepared to hold their nerve and play the longer game. Share prices could still go down as well as up though.

Brazil’s Lula makes a comeback

Elsewhere, Luiz Inácio Lula da Silva claimed victory in Brazil’s presidential election in October, defeating incumbent right-wing leader Jair Bolsonaro. Lula previously served two terms between 2003 and 2010, and was subsequently accused of corruption, but his convictions were later annulled.

While Bolsonaro operated a more populist agenda, Lula aims to bring back democratic stability to the country and reduce social inequalities. Lula has also promised to crack down on Amazon deforestation after it surged under Bolsonaro.

It’s not entirely clear yet though how Lula will fund his fiscal agenda. He hopes to increase the minimum wage, maintain social welfare payments, and provide extra support for poor families with young children. There could well be some uncertainty until Lula takes office on 1 January and lays down firmer plans.

How have stock markets performed?

Over the past year, the broader emerging stock market has fallen 14.38%*, while the Asia Pacific ex Japan market has lost 16.23%. As always past performance isn’t a guide to future returns.

Performance of the underlying markets has been mixed though. The Brazilian market rose 46.24% over the year to the end of October 2022. As a resource-rich country, Brazil has benefited from rising commodity prices, while exports of oil to Europe and the US also picked up following Russia’s invasion of Ukraine.

The Singaporean market has also held up well over the year, rising 16.29%. According to the International Monetary Fund, Singapore’s effective management of the pandemic, swift vaccination rollout and decisive policy support has helped the economy recover.

Its market is also made up of more value-focused industries, like financials and real estate, which has helped during a year where growth-oriented sectors like technology have struggled.

China’s market, on the other hand, has fallen 37.33% over the past 12 months. The recent party congress, alongside the country’s zero-Covid policy, slowing economic growth and a struggling property sector have all conspired to weaker share prices.

The Vietnamese market has fallen almost as much as China over this time, falling 34.48%. This was partly due to a government crackdown on market manipulation. A weakening currency and liquidity concerns (the ease with which stocks can be bought and sold) have also dampened investor sentiment.

Emerging stock markets - one year performance

Past performance isn’t a guide to the future. Source: *Lipper IM, to 31/10/2022.

While Asian and emerging countries are often lumped together, they can behave quite differently. The performance of these markets over the past year shows how this part of the world can be home to both the best and worst-performing global stock markets at any one time. That’s why a diversified approach is best when it comes to investing in these markets.

Emerging markets have faced problems this year, and uncertainty could linger. But this isn’t new. These markets are constantly going through transition, and volatility is a natural part of developing economically. Emerging markets are higher risk than developed markets. There’s still a lot of growth potential in these markets, though it’s essential for investors to take a long-term view.

How have Wealth Shortlist funds performed?

Asian and emerging markets Wealth Shortlist funds have delivered mixed performance over the year. We usually expect this. A range of managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

Remember, past performance isn’t a guide to the future, and performance here is over a short time. All investments fall as well as rise in value, so you could get back less than you invest.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

With India as one of the stronger-performing markets, the Stewart Investors Indian Subcontinent Sustainability and Jupiter India funds were the two strongest-performing Wealth Shortlist funds over the past year.

In terms of broader Asian funds, Jupiter Asian Income has performed best over this time. The fund doesn’t currently invest in China as the fund’s manager has his concerns, both economically and politically. The fund mainly focuses on more developed Asian markets, like Singapore, Australia, and Taiwan. The fund also pays investors an income, making it different from many other Asian funds that focus on growth. The fund’s charges are taken from capital which can boost the income paid but reduce some of the potential for capital growth.

Funds with greater exposure to China have been weaker this year. This includes JPMorgan Emerging Markets, which focuses on quality companies with sustainable or higher-growth earnings prospects, including some Chinese tech companies.

More broadly, businesses that are expected to do better during an economic recovery have performed better since the Covid-19 vaccine announcements in November 2020. This includes materials, industrials, and commodities-related companies. The fund’s managers don’t invest as much in this type of company, so the fund missed out on some of the gains made.

The managers continue to focus on companies they expect will grow more sustainably over the long run. This includes those that could benefit from innovation and growth in how much people consume.

FSSA Greater China Growth, which mainly invests in China and Taiwan, has also been a weaker performer this year because of the market challenges. That said, the manager’s more conservative investment style and focus on companies with good levels of corporate governance has helped the fund to hold up and perform better than the average fund in the IA China/Greater China peer group.

Find out more about Stewart Investors Indian Subcontinent Sustainability, including charges

Stewart Investors Indian Subcontinent Sustainability Key Investor Information

Find out more about Jupiter India, including charges

Jupiter India Key Investor Information

Find out more about Jupiter Asian Income, including charges

Jupiter Asian Income Key Investor Information

Find out more about JPMorgan Emerging Markets, including charges

JPMorgan Emerging Markets Key Investor Information

Find out more about FSSA Greater China Growth, including charges

FSSA Greater China Growth Key Investor Information