The recent unease surrounding the investment environment in China is proving to be advantageous for emerging markets like India, according to Ron Temple, the chief market strategist at financial advisory and asset-management firm Lazard.
During the latest quarter, foreign direct investment in China experienced its first decline in 25 years. This decline can be attributed to the ongoing technological and mineral disputes between Beijing and Washington, which are deemed crucial for national security and electric vehicles. The tensions have only intensified further, as evidenced by the tightened rules implemented by U.S. officials regarding the sale of artificial intelligence-enabling chips to China.
Temple asserts that instead of returning to developed countries, the capital outflows from China seem to be flowing towards emerging markets like India, Vietnam, and Mexico. This shift presents promising opportunities for investors and implies a bet on the interest-rate cycle, with emerging markets potentially outpacing the Federal Reserve when it comes to lowering borrowing costs.
“I believe, based on our analyzed data, that the capital leaving China is not finding its way back to the U.S., Europe, or Australia,” Temple mentioned in an interview. “In all likelihood, it is flowing into other emerging markets.”
India stands as an example of the potential returns that investors can expect. The country’s Nifty index, which tracks the performance of the top 50 companies on the National Stock Exchange, has surged by more than 20% since the end of March, surpassing the S&P 500 and several other major markets.
The International Monetary Fund projects India’s economic growth at 6.3% for its fiscal year ending in March, while India’s central bank anticipates a figure of 6.5%. This growth rate outpaces that of China, with the IMF estimating a growth rate of 5.4% for China in 2023.
The Shifting Landscape of Emerging Markets
The rapid rise in interest rates in the U.S. and eurozone has posed a significant challenge for central banks in emerging markets. These banks have had to diligently follow suit in order to safeguard their currencies and export advantage.
However, according to Temple, if developed market rates begin to decrease, there will be less vulnerability for emerging-market currencies. This would provide an opportunity for these countries to implement further rate cuts.
Throughout this year, countries such as Brazil, Uruguay, Chile, Peru, and Poland have already executed rate cuts. Meanwhile, many other emerging markets have chosen to keep their central banks on hold.
While the U.S. seems likely to avoid a recession, Temple believes that developed economies may face a period of sluggishness in 2024. Conversely, economic growth in emerging markets could be robust, potentially prompting investors to reevaluate valuations in these markets.
China no longer holds the spotlight alone. Temple highlights that there is now an intriguing geopolitical shift occurring, which presents opportunities for investment in countries outside of China. These nations offer attractive returns on capital, a thriving growth dynamic, and the freedom for their central banks to further reduce interest rates.
A recent report by Lazard emphasizes the anticipation of substantial earnings growth in South Korea’s information-technology sector between 2024 and 2025, with expectations close to 70%. Additionally, market forecasts point towards a nearly 20% improvement in earnings for Taiwan, Turkey, Egypt, and India.
Based on this positive outlook, Lazard concludes that emerging markets are currently undervalued as an asset class on a global scale. In fact, equity valuations in these markets are at a discount of approximately 35% compared to U.S. stocks, which is significantly wider than their long-term averages.
