Fiscal stimulus and a looser monetary policy have improved China’s prospects, but the current slowdown of its economy, rising inflation and supply chain problems will likely mean near-term volatility for Asian markets. However, this should not derail the structurally positive forces at work in many emerging market economies.
Since May, China has been fine-tuning its Covid containment measures, including reducing quarantine periods and rapid, targeted lockdowns. We expect the medium-term policy direction to be more pro-growth and pro-business, with a focus on high-value manufacturing, hard tech production, import substitution and technological self-sufficiency.
Equity market technicals look particularly favourable, in our view. Our Greater China equities team is sticking with selected high-quality growth companies that have resilient fundamentals amid the macroeconomic downturn.
As for Asia and emerging markets, we believe the growth path into 2023 will depend on the policies of individual governments on Covid control, market reopening, and responses to inflation. The key driver of Asia’s post-Covid recovery – external demand – is losing steam. Amid weaker global growth, it is crucial to focus more on domestic demand opportunities.
Asian and EM equities have now priced in much of the weaker global conditions. Current earnings per share (EPS) estimates for 2023 are above those for 2022. Modest valuations, light investor positioning and good fundamentals are buffers against near-term volatility.
Our Asia & Global Emerging Markets team is focused on structural trends, strong business models and high-quality companies with low debt that can generate sustainable returns with sound or improving environmental, social and governance (ESG) profiles.
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