Emerging markets appear solid bet to attract money leaving China | Mint

Emerging markets appear solid bet to attract money leaving China

Foreign direct investment in China shrank for the first time in 25 years during the latest quarter as Beijing and Washington sparred over technology deemed sensitive to national security and critical minerals used in electric vehicles. (Image: Pixabay)
Foreign direct investment in China shrank for the first time in 25 years during the latest quarter as Beijing and Washington sparred over technology deemed sensitive to national security and critical minerals used in electric vehicles. (Image: Pixabay)

Summary

The big winners from rising skittishness over the investment environment in China appear to be emerging markets such as India, the chief market strategist at financial advisory and asset-management firm Lazard said.

SYDNEY—The big winners from rising skittishness over the investment environment in China appear to be emerging markets such as India, the chief market strategist at financial advisory and asset-management firm Lazard said.

Foreign direct investment in China shrank for the first time in 25 years during the latest quarter as Beijing and Washington sparred over technology deemed sensitive to national security and critical minerals used in electric vehicles. Tensions have intensified further since then, illustrated by U.S. officials tightening rules around the sale of artificial intelligence-enabling chips to China.

Ron Temple, Lazard’s chief market strategist, said money flows appear to have shifted toward emerging markets such as India, Vietnam and Mexico rather than diverting back to developed countries, and this is creating opportunities for investors. It also represents a bet on the interest-rate cycle, with emerging markets potentially outpacing the Federal Reserve when lowering borrowing costs.

“My view, based on the data we’ve analyzed, is that the money coming out of China is not going back to the U.S. or Europe or Australia," Temple said in an interview. “It’s going to other emerging markets in all likelihood."

India shows the returns on offer to investors. India’s Nifty index, tracking the country’s top 50 companies on the National Stock Exchange, has soared by over a fifth since the end of March, outperforming the S&P 500 and most other major markets.

The International Monetary Fund puts India’s economic growth at 6.3% for its fiscal year through March, while India’s central bank is expecting a figure of 6.5%. That is faster than China’s economic growth, which the IMF estimates will be 5.4% in 2023.

Temple said the rapid rise in interest rates in the U.S. and eurozone had presented a challenge to central banks in emerging markets, which had to follow suit to protect their currencies and export advantage.

“But if developed market rates are coming down then there’s less vulnerability for [emerging-market] currencies," Temple said. “That means they can cut rates more."

Countries including Brazil, Uruguay, Chile, Peru and Poland have cut rates this year, while central banks are on hold in many other emerging markets.

While the U.S. looks set to avoid a recession, Temple thinks developed economies may be sluggish in 2024. In contrast, economic growth in emerging markets could be stronger, which may lead investors to reassess valuations there.

“You’ve got this interesting geopolitical shift creating opportunities in countries outside of China," Temple said. “You’ve got improving returns on capital, you’ve got a better growth dynamic, and you’ve got EM central banks that will be free to cut rates more."

In a recent report, Lazard noted that consensus expectations for earnings growth in South Korea in 2024-2025 are close to 70%, driven by a recovery in its information-technology sector. Market forecasts also point to near 20% improvement in earnings in Taiwan, Turkey, Egypt and India.

That outlook led Lazard to conclude that emerging markets are one of the most mispriced asset classes globally, with equity valuations at a discount of some 35% to U.S. stocks, much wider than their long-term averages.

Write to Alice Uribe at alice.uribe@wsj.com

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