Asia and emerging markets sector review – will China hit its growth target?

As we approach the end of 2023, global financial markets are grappling with numerous headwinds.

Ongoing conflict in the Middle East, the prospect of higher interest rates for longer, and persistent concerns about the Chinese economy are among the key challenges for investors.

A pivotal question for the year remains – can China achieve its 5% growth target – it’s lowest in over 30 years.

Encouragingly, green shoots have started to emerge, with the economy growing by 4.9% year-on-year through September, surpassing market expectations.

President Xi's administration has employed various measures to spur on growth, particularly in the property sector, which forms a material part of the country’s GDP. This sector has plagued the Chinese economy since 2020, following a change in regulation to limit borrowing of real estate businesses.

Nevertheless, the issues persist. All-time high youth unemployment and record levels of savings, which aren’t being effectively channelled into consumption, need to be addressed soon.

Whether they do or don’t hit this target, all eyes will be on policymakers in 2024 to see how they try to tackle these problems.

Will the momentum continue in India?

In contrast, India’s economy marked an impressive 7.8% year-on-year GDP growth by the end of June. Looking ahead to 2024, there are no signs of a slowdown, with the International Monetary Fund (IMF) forecasting robust GDP growth of 6.3%.

India’s set to outpace other emerging economies, including China. And taking a longer-term view, it’s projected to surpass both Germany and Japan by 2028, which would make it the third-largest economy globally.

Is this growth sustainable?

If we look at India's demographics, nearly 70% of its 1.4bn population fall within the working-age bracket. This demographic advantage is expected to underpin India's ambitious growth trajectory.

The rise in consumption, especially among the middle class, is also going to be a significant theme for investors. By 2050, India is projected to contribute roughly 40% to global middle-class consumption, a substantial increase from the current 5%.

These positive trends have prompted questions about valuations, with some fund managers acknowledging the challenge of finding attractive opportunities.

However, it's worth noting that despite being relatively expensive compared to its regional counterparts, India offers numerous advantages. These include better corporate governance standards, favourable global sentiment, and growing foreign direct investment. Corporate balance sheets have also significantly strengthened over the past decade.

There will ups and downs along the way, but there’s no doubt that India will play a crucial role in global economic growth over the coming decades. And with that will come plenty of investment opportunities.

3 fund ideas to invest in India

How have stock markets performed?

It’s been a positive twelve months (to end of October) for emerging and Asian markets.

The FTSE Emerging and FTSE Asia Pacific ex Japan indices rose by 5.66%* and 6.28%, respectively. This is broadly in line with the global stock market with the FTSE World index rising by 5.68% over the same timeframe. Past performance isn’t a guide to the future.

China has driven both indices forward following a 13.05% increase in the FTSE China index. The majority of this performance was from the start of the period, but the trajectory has been downwards since the end of January.

Given China's large weighting in both Asian and emerging market indices, its performance can have a notable impact on the overall market return.

To put this into perspective, if we look back over the past three years, the FTSE China Index has declined by over 43% which has pushed Asian ex Japan markets into negative territory. Meanwhile, the emerging index only grew by 0.19%.

In contrast, India, the second largest country in both indices, has been the star of the show. The FTSE India’s 12 month return of 2.18% might look lacklustre. However, it’s grown by 63.83% over the past three years and outperformed throughout most of 2023 so far.

Strong economic data has helped drive stock market performance. Small and mid-caps performed especially well, alongside those leaning into the domestic economy like financial services and consumer-focused names.

Elsewhere in the region, Taiwan was a notable performer with the FTSE Taiwan index, soaring 21.04% over the past 12 months.

However, it’s important to bear in mind that one company – TSMC – makes up nearly half of this index, so therefore has a significant impact on performance.

In terms of valuations, companies in many Asian and emerging markets are trading at an attractive discount relative to their developed market peers, especially the US.

This varies from country to country, but China looks cheap relative to its history. In contrast, India is a tad expensive. Style wise, ‘value investing’ has outperformed ‘growth’ so far in 2023 but continues to trade at a large relative discount – around 50%.

Annual percentage growth (%)

Past performance isn’t a guide to the future. Source: *Lipper IM to 31/10/2023.

If you’re looking to invest in emerging markets and are happy with the higher risk that comes with it, a broad global emerging markets or Asian fund is likely a good starting point.

Other funds could then be added to a portfolio for more exposure to a particular theme, area, or country.

It’s essential for investors to take a long-term view of at least five years though.

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 active and passive 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 this is performance 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. Investors should be aware that both the funds below invest in higher-risk emerging markets.

Jupiter India

The best performing Asian and emerging markets Wealth Shortlist fund over the past 12 months was Jupiter India.

The fund returned 18.98% vs 3.06% for the IA India/Indian Subcontinent sector average.

The funds’ bias towards higher-risk small and medium-sized companies was a tailwind for performance, alongside good stock selection, especially within financial services and consumer-focused companies.

The managers adopt a GARP (Growth at a Reasonable Price) approach. This means they look for companies that grow their earnings consistently, and whose shares can be bought at a price they don’t think reflects this earnings potential.

Abrdn Asia Pacific Equity

Over the past 12 months, the Abrdn Asia Pacific Equity fund was our weakest performing Wealth Shortlist fund within Asia and emerging markets.

The fund fell by 1.14% versus a 4.48% rise for the IA Asia Pacific ex Japan sector average.

Stock selection in China and South Korea held back performance, alongside an overweight position in Hong Kong.

Flavia Cheong and her team are hunting for 'long-term quality'. They believe most investors underestimate the sustainability of returns that many high-quality companies can make. They aim to find companies which can generate long-term growth, which have been overlooked by others and hold onto them for many years.

Annual percentage growth (%)

Past performance isn’t a guide to the future. Source: Lipper IM, to 31/10/2023.

More about Jupiter India, including charges

Jupiter India Key Investor Information

More about FSSA Greater China Growth, including charges

FSSA Greater China Growth Key Investor Information

More about abrdn Asia Pacific Equity, including charges

abrdn Asia Pacific Equity Key Investor Information

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