The picture away from China potentially looks bright for investors too. Chinese stocks account for 30 per cent of the emerging markets equity market, with India, Taiwan, Korea, Brazil and Saudi Arabia collectively accounting for 50 per cent.
All of these economies are expected to substantially outperform their developed market counterparts in the coming years, which translates into higher expected long-term earnings growth for emerging market stocks.
This is supported by structural trends such as improving gross domestic product per capita and the broadening of financial markets.
Currently, emerging markets stock market prices are implying a limited expectation of economic growth, which is reflected by low valuations.
By comparing the P/E ratio we can compare value across markets. At the end of 2023, emerging markets equities were trading at 12 times earnings, making it one of the cheapest regions at a time when global developed equities were trading at more than 20-times earnings.
Although history never repeats itself, the current valuation picture for emerging markets is much like it was throughout 2015 and 2016 – a period followed by two years of emerging markets substantially outperforming.
However, while China’s status as the leading emerging market power is potentially decaying, it still holds a considerable sway on the outcomes of the broad collective.
So, while the outlook for emerging markets is improving, now is not the time to jump in with both feet.
Most investors will need to see signs that China’s latest policy measures have the desired impacts on consumer sentiment and economic activity.
Similarly, while the long-term structural trends for local companies are appealing, investors also need to be mindful of nearer-term dynamics.
So far, emerging market countries have seen less earnings growth than global equities and, until this improves, investors will be reluctant to increase their exposure to emerging markets.
All of which suggests that, while the case for greater emerging markets exposure is building, we are still at the very early stages of any recovery, awaiting more concrete evidence of improvement.
Sacha Chorley is portfolio manager at Quilter Investors
