Vontobel Multi Asset Boutique
The sell-off in Chinese equities after the recent communist party congress in Beijing has been a stark reminder that so-called “country risks” can be high when investing in emerging markets (EM). It’s true that everybody pretty much knew that Xi Jinping would be handed a third term as president. But what took the market by surprise was the bold confirmation of China’s zero tolerance towards the Covid-19 pandemic, dashing hopes for an easing of restrictions. Likewise, investors looking for an announcement of economic stimulus measures were disappointed. Add to that the very public escorting from the main stage of a former leader, Hu Jintao, who appeared to resist removal. It amounted to a dramatic display of power being consolidated, raising questions about top-level governance issues.
While strict pandemic-related lockdowns across the country continue to weigh on the economy, the situation is made worse by structural problems that refuse to go away. Double-digit youth unemployment rates, a rapidly ageing population and a property market that is supported by highly indebted Chinese real-estate companies all pose significant challenges. Deglobalisation and the recent efforts of the United States to restrict the supply of semiconductors to China are further points of concern.
The emerging markets are where nearly two thirds of the world’s population live – they can’t be ignored. But many investors have begun to direct their gaze at lower-profile countries that have been eclipsed by the world’s second-largest economy so far (“EM ex-China”). Currently, a group formerly known as “the fragile five” might well provide the best opportunity. Please have a look at our focus article in this edition for the details.
We will continue to follow emerging markets including China closely. At the time of writing, there is speculation in the press that China may now consider an easing of lockdown policies. Meanwhile, as with all investments, the final decision on where and when we invest is the result of whether the estimated return potential can compensate us for the risk taken.