Emerging markets in Southeast Asia look the most appealing in a global context, according to a 2023 outlook survey of 500 global institutional investors by Natixis Investment Managers (Natixis IM), titled “After the Gold Rush”.
In emerging markets, the surveyed institutional investors see the best growth opportunities in Asia ex-China. China’s overall approach to Covid has accelerated the move to a lower path of growth the country already was on, according to Mabrouk Chetouane, head of global market strategy and international solutions at Natixis IM.
Therefore, the asset manager believes that the short-term optimism on the Chinese reopening is likely to wane as cases pick up.
“The activity restart will prove slower than expected and be a H2 2023 story. Against other countries in the region, the tighter government control of the economy makes Chinese assets less attractive despite their strong attractiveness from a valuation standpoint,” Chetouane told AsianInvestor.
In general, the surveyed investors are likely to favour developed markets in 2023 as emerging economies remain vulnerable to inflation shocks. Nearly two-thirds (65%) believe inflation will hinder emerging market investment.
One reason may be almost the same number (64%) believe emerging markets are at the mercy of US monetary policy. Emerging markets rely on foreign investment and capital, which is harder to come by when the US dollar is strong relative to other currencies.
Rising rates also make it harder for emerging market companies to make good on dollar-denominated debt, increasing default risk. Further out, 48% believe that increasing focus on ESG will reduce emerging market opportunities.
Two-thirds (66%) of respondents agree that emerging markets in Southeast Asia are overly dependent on China, and 74% think China’s geopolitical ambitions have reduced its investment appeal.
In the years leading up to the Covid crisis, China became the leading source of imports for 70% of Asian countries, and the leading export destination for 50% of them, according to Bank of France data.
Moreover, China has introduced reforms aimed at reducing tariffs and trade barriers with Asian countries: duties on ASEAN countries’ goods sold in China have seen their average rate dropping from 9.8% in 2010 to 0.1% in 2020, according to the OECD.
ASEAN is now the main platform for the transit of Chinese intermediate goods to the rest of the world, and China’s share of ASEAN countries’ global trade flows rose from less than 5% in 2000 to 20% in 2021, also according to OECD figures.
“China and the ASEAN country members signed the Regional Comprehensive Economic Partnership in November 2020, arguably the largest free trade agreement in history where China is the biggest contributor,” Chetouane said.
HARD TO IGNORE
China’s geopolitical ambitions have reduced the country’s investment appeal, according to 74% of surveyed institutional investors, despite the country’s size and growth potential.
Furthermore, 65% of investors globally believe that China’s geopolitical ambitions will lead to a division of the global economy into a two-world order, with China and the US representing the biggest spheres of influence.
According to Chetouane, the outcomes of November’s National Party Congress should be seen as confirmation that the surge in the political risk premium of Chinese assets, witnessed in the recent past, is likely to linger for years to come.
“Having said that, we think investors with sufficient investment horizon and capable of bearing the volatility should not disregard China,” he said.
It follows that institutional investors should reassess the risk-adjusted returns they expect to achieve by investing in the region. But the broader case for continued investment in China remains unchanged: its size.
“China continues to be the world’s second largest economy and is on its way to add 300 million to its middle-income group during the next decade, from its current estimated 400 million level,” Chetouane said.
The survey was conducted by CoreData Research in October and November 2022. It included 500 institutional investors in 30 countries throughout North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East.
Natixis IM did not provide specific survey results for Asia Pacific-based investors, nor a breakdown of investors by country of origin or by investor type, such as pension fund, insurer or sovereign wealth fund.