Asia and emerging markets sector review – optimism as China re-opens for business

In December 2022, China finally started moving away from its strict zero COVID-19 approach, relaxing some of the restrictions it had in place. Once into the new year, restrictions on travel and the requirement to quarantine on arrival were removed too.

This has prompted hopes of a broader economic boost to the region. China is a big consumer of hard commodities and this should help support Asian and emerging stock markets.

Despite this, there are some worries that increased travel in the region could be a catalyst for higher coronavirus rates. There’s also some uncertainty over how spending patterns might have changed, given how long restrictions have been in place.

However, while China’s re-opening has been grabbing all of the headlines at the start of the year, an old familiar story is still lurking in the background.

Tensions between the US and China aren’t expected to be resolved anytime soon. The jostling of these mega-economies has wide ranging implications for economies globally. Any attempts to ‘decouple’ completely will be difficult given the impact on businesses and difficulty in unwinding complex supply chains.

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

Interest rates, growth and politics

China’s re-opening aside, there are a few other key issues that look set to sway the fortunes of Asian and emerging markets in 2023.

As the world’s most influential central bank, what the US Federal Reserve (Fed) do to control inflation has important knock-on effects for these markets. Rising US interest rates are often thought to be bad news for emerging market economies. That’s because they can increase debt burdens, trigger capital outflows away from their economies to the US, and generally cause a tightening of financial conditions.

However, with signs that inflation might have peaked in the US, assuming no surprises, the worst of this pressure could be over.

The path of global economic growth is important too. The more cyclical markets in the region are more likely to come unstuck if the anticipated global slowdown sets in. Cyclical companies’ goods and services are in demand when the economy is doing well, but have tended to see revenues fall when the economy falls on hard times.

As ever with Asian and emerging markets, investors will be hoping for a calm year on the political front.

October 2022 saw the important Brazilian presidential election conclude with Luiz Inácio Lula da Silva claiming victory, defeating right-wing ex-leader Jair Bolsonaro. Lula aims to bring back democratic stability to the country and reduce social inequalities. He’s also promised to crack down on Amazon deforestation after it surged under the former president Bolsonaro.

How have stock markets performed?

Over the year to the end of January 2023, the emerging stock market has fallen 2.73%*, while the Asia Pacific ex Japan market delivered a small gain of 2.69%. This compares with a gain of 1.41% for the broader global stock market. As always past performance isn’t a guide to future returns.

Performance of the underlying markets has been mixed though. Singapore has been the strongest of the main markets. On the other hand, China has been the weakest with the country’s citizens having their freedoms restricted for most of the year.

Asian and emerging stock markets - one year performance

Past performance isn’t a guide to the future. Source: *Lipper IM, to 31/01/2023.

Past performance isn’t a guide to the future. Source: *Lipper IM, to 31/01/2023.

While Asian and emerging countries are often lumped together, they can behave quite differently. The performance of these markets over the past year shows this.

Emerging markets have faced problems, 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.

If you’re looking to invest in emerging markets and are happy with the higher risk that comes with it, we think a broad global emerging markets or Asian fund is likely to be a good starting point. Other funds could then be added to a portfolio to invest in a particular theme, area, or country. 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 and any income from them can 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.

The strongest performer of our Asian Wealth Shortlist funds over the last year has been the Jupiter Asian Income fund, managed by Jason Pidcock.

The fund doesn’t currently invest in China as the fund’s manager has concerns both economically and politically about the country’s direction. Instead, it focuses on more developed markets, like Singapore, Australia, and Taiwan.

FSSA Greater China Growth was the weakest performer of our Asian Wealth Shortlist selections over the last year. This was down to the market challenges the fund faced.

That said, the manager’s more conservative investment style and focus on companies with good levels of corporate governance helped the fund hold up. It performed better than the average fund in the IA China/Greater China peer group.

The strongest performer of our Wealth Shortlist selections in the emerging markets sector over the last year was the iShares Emerging Markets Equity Index, though it still fell in value. The fund invests in a broad spread of companies based across emerging countries, including China, Taiwan, India and Hong Kong.

The Schroder Asian Discovery fund was the weakest performer of our emerging markets Wealth Shortlist selections over the last year.

The fund invests in smaller businesses based in Asian and emerging markets or that make most of their money in these areas. These businesses offer lots of growth potential. However, they're higher risk because they're at an earlier stage of their development. They also haven't tended to hold up as well in a falling market.

Past performance isn’t a guide to the future. Source: Lipper IM, to 31/01/2023.

Past performance isn’t a guide to the future. Source: Lipper IM, to 31/01/2023.

More about Jupiter Asian Income including charges

Jupiter Asian Income Key Investor Information

More about FSSA Greater China Growth including charges

FFSA Greater China Growth Key Investor Information

More about iShares Emerging markets equity index including charges

iShares Emerging markets equity index Key Investor Information

More about Schroder Asian Discovery including charges

Schroder Asian Discovery Key Investor Information

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