Half a world away
But for Tom Kynge, portfolio analyst at Sarasin and Partners, the picture is more nuanced, with an increasing divide among emerging market economies between those with prospects strongly linked to China and those whose prospects continue to rely on the US.
He says: “Emerging market growth drivers have become increasingly disparate in the past few years due to trends such as near-shoring and the rising geopolitical tensions between China and the US. Having said that, all emerging market countries are still significantly reliant on both major powers but to varying degrees.
"Proximity is still a major determinant of economic reliance. Mexico’s manufacturing business is more likely to be reliant on the US market while Vietnamese businesses are more likely to have close ties with their Chinese counterparts.
"As China is likely to provide the majority of the impulse to global growth in the year ahead – while US economic growth is expected to moderate – you could argue that Chinese economic growth may be the more important emerging market economic growth this year.”
Kamil Dimmich, emerging market equity investor at North of South, says that while emerging markets underperformed in 2022, “they fell only in line with developed markets really. But even then it was China that dragged the rest down, the commodity exporting countries within the emerging markets actually performed well.”
Sai says the strength of the dollar (see article one) and the Chinese investment cycle are the two factors that determine emerging market economic performance, but he is confident about the outlook for the Chinese economy right now, and says one area of potential comfort for investors is that central banks in Asia, including China, are pursuing what he calls “orthodox” economic policies, which should make it easier for investors to understand the direction of travel for those economies.
Toub says India seems to have its own economic drivers, rather than be reliant on China. India is not a commodity producer or seller of luxury goods, but does have a large population of its own.
He says that increasingly emerging market investors tend to want to own either India or China, and that right now he feels Chinese equities are cheaper, as they performed poorly in 2022, whereas Indian equities did well.
As both India and China are commodity importers, growth in either is likely to benefit the commodity exporters within the emerging markets universe.
David Thorpe is investment editor at FTAdviser
