Emerging market (EM) equities are not for the faint of heart. Investors can expect dramatic price movements in response to geopolitical events – and given more than half the global population is voting in elections this year, volatility is all but guaranteed. Add in continued US dollar strength (typically a headwind for EM economies) and managers in charge of generalist emerging market funds clearly have their work cut out, as do investors chasing returns across the asset class.
The diverging fortunes of China and India have been the focus of much attention in the post-pandemic era. Positive demographic trends and a resilient economy have turned the latter into a standout among the emerging market cohort. Meanwhile, China’s stuttering economic recovery, regulatory crackdowns and slide into deflation have done little to endear it to foreign investors. This does, however, mean that the country’s stocks look cheap. Whether they’re undervalued – especially in relation to high-performing peers in India – is up for debate.
“If Chinese equities are to return to favour convincingly, investors will need consistent and supportive policies, a stable regulatory environment, and a welcoming stance towards overseas investment in Chinese companies,” says Rob Morgan, chief investment analyst at Charles Stanley. “Suffice to say these things are not necessarily a given, which makes China higher risk and means a big discount to other markets is merited.”