Emerging markets: where else to look in Asia while China remains weak

Subdued US imports are weighing on Asian economies such as China. Investors should look instead to countries driven by strong domestic demand, argues Pendal’s JAMES SYME

• Weak growth outlook for China, Korea, Taiwan and Thailand
• Indonesia and India look more promising
• Find out about Pendal Global Emerging Markets Opportunities fund

THE World Bank’s latest economic outlook for east Asia contains some stark views.

Highlighting weakness in China’s economy and an ongoing slowdown in Asian exports, the bank forecasts GDP growth decelerating to 4.5 per cent in the region.

This would be relatively weak growth historically, excluding short-term shocks such as the 1970s oil crisis, the 1990s Asian financial crisis and Covid.

To what extent is this view borne out in other data?

How are Pendal’s emerging markets portfolio managers adjusting their strategy as a result?

Here is the latest update from James Syme, Paul Wimborne and Ada Chan, fund managers for Pendal Global Emerging Markets Opportunities fund:

China’s outlook

We do see continued weak growth in China.

A combination of tighter monetary and fiscal policy, intervention in the private sector and the effects of the pandemic have slowed a number of key Chinese economic metrics.

In the year to August, property investment is down 8.8%, 12-month trailing USD exports have fallen 5.4% and PMI manufacturing data sits just above 50.

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Retail sales are ahead 4.6% over the period and industrial production has picked up by 4.5%.

But GDP growth forecasts continue to be downgraded by multi-lateral institutions like the World Bank and the private sector.

Global trade drag

One of the drags on China’s economic growth in China — and Asia more widely — is what’s happening to global trade.

International goods trade has been growing more slowly than industrial production in recent quarters — an unusual pattern which has significant implications for Asia.

This is largely due to increased friction on trade in manufactured goods, due to factors such as tariffs and non-tariff barriers.

(You can read more detail in the World Bank’s September 2023 global update – download PDF here).

China is the world’s biggest exporter — and the US is the world’s biggest importer.

But trade between the two has been under stress since 2018 when the Trump administration first put tariffs on Chinese exports of solar panels and washing machines.

Since then, China’s share of US imports has declined from 21.4% to 14.7% in the five years to July 2023. In absolute value, it’s declined from $47 billion per month to $36 billion.

This loss of market share comes against a backdrop of a lower intensity of trade in the US economy.

Since July 2018, US imports have increased by 17.9% (in USD terms), but the US economy is 31.5% bigger.

With a weaker Chinese economy and a lower intensity of trade in the US economy, major Asian exporters are showing stress.

In the year to August, Korean exports were down 8.4%, Taiwanese exports fell 7.3%, Singapore’s non-oil exports were off 20.1% and Thailand’s exports decline 1.8%.

Much of Asia’s long-term economic success has been built on a manufacturing export-led model. We largely see the traditional Asian export economies as more challenging from an equity investment viewpoint.

We are underweight in China, Korea, Taiwan and Thailand, seeing weak growth in all four.

Where to look for opportunities

However, some Asian economies have pursued different growth paths.

Indonesia is a major exporter of commodities including nickel, coal, oil and gas and food.

India has been succeeding at services exports — its services exports were up 8.4% year-on-year in August.

These big, sub-continental economies are driven more by domestic demand than exports — and domestic demand growth remains robust in both.

Asia’s long-term growth model has largely been built on manufacturing exports, but that is not the only path to growth.

We now see other models creating better growth opportunities — and Indonesia and India are our only overweight country positions in east and south Asia.

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

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