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This is a chapter from the Emerging markets: An evolving landscape paper. To read all chapters in this paper, click here.

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In 2023, the MSCI China index was down 11%, while MSCI Emerging Markets (EM) ex. China Index was up 20%—performance gap of over 30%. From the end of 2018 to the end of 2023, this performance gap had increased to over 50%.1

This recent underperformance of China versus other EM countries has dragged down asset class returns, causing some investors to question their overall allocation to it. There are three primary concerns relating to the performance of Chinese equity markets:

  1. The domestic economy and the real estate market in particular.
  2. Geopolitics (especially China-US relations).
  3. Finally, the direction of domestic policy as it relates to the private sector.

These concerns have led to a material valuation derating in equity markets—a persistent selloff evidenced by the MSCI China Index performance. But we think China presents a counter consensus valuation opportunity.

Despite the challenges presented by the Chinese market, there are several indicators that suggest a positive outlook for investors. The government’s anticipated stabilisation of the real estate market, the decrease in geopolitical tensions with the United States, and the return of an equity market driven by fundamentals rather than flows, all of which should help to reduce uncertainty and raise confidence in China. This may then encourage global allocators to shift towards a more neutral or even overweight position in China. In our opinion, these factors will increase positive sentiment towards China and, by extension, the EM asset class.

Endnote

  1. Source: FactSet, as at 31 May 2024.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results. 

Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.

There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.

US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

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