In China, the rabbit symbolizes luck and prosperity.
Dusseldorf In China, the “Year of the Rabbit” began on January 22, 2023. In Chinese culture, it symbolizes peace and prosperity. The hope could come true. With the abandonment of the zero-Covid strategy, the Chinese government has fundamentally changed its policy. “The lights are green again for Chinese equities,” says Xavier Hovasse, fund manager and head of emerging markets at French investment firm Carmignac.
“Of the five factors that weighed on China’s stock markets in 2021 and 2022 — tighter regulation, the housing crisis, the zero-Covid policy, local politics, and China-US tensions — four are now largely irrelevant,” is Hovasse convinced.
Only the conflict between the USA and China flared up again, among other things with the debate about the spy balloon. Hovasse expects growth of around 5.0 percent in China: “This would make China the only major economic area whose economic growth is accelerating this year,” says Hovasse.
This is also reflected in the performance of the stock markets, which anticipate the future. The Chinese stock exchanges have reacted positively to the move away from the tough corona policy. As China strengthens, emerging markets are regaining interest among investors. Because of the high risks of individual investments, there is a lot to be said for investing in investment funds.
In addition to actively managed portfolios, investors can also invest in index funds (ETFs), which track an index and are cheaper than actively managed products. To do this, they have to be content with the return on the index.
The “Fidelity Sustainable Emerging Markets Equity Fund” is one of the actively managed investment funds with a positive long-term track record. He invests in a portfolio of 30 to 50 companies. The fund management invests independently of benchmark indices and can use in-house research. The prospects are positive: “We expect a clear shift in growth from the USA to Asia,” Carsten Roemheld, capital market strategist at Fidelity International, is convinced.
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Fidelity’s fund management uses a sustainability filter when selecting stocks. At least 70 percent of fixed assets are invested in companies that are considered sustainable. In the current market situation, it weights the consumer, IT, industrial and financial sectors more heavily. The largest individual positions are semiconductor manufacturer Taiwan Semiconductor and Chinese milk producer China Mengniu Dairy.
In the JP Morgan Emerging Markets Dividend equity fund, fund manager Omar Negyal focuses on companies in emerging markets with a high dividend yield. The fund’s dividend yield is currently 4.8 percent. “Dividend payouts are positively correlated with superior governance,” says Negyal. Therefore, a dividend approach is very well suited to manage corporate risk when investing in emerging markets.
For Negyal, pricing power is an important criterion when selecting stocks. Chinese equities make up the largest portion of the portfolio at 27 percent, followed by India at 20 percent and Taiwan at 12 percent. “There are countries with a stronger dividend culture, which is why we weight Taiwan more than Korea, for example.”
The fund manager prefers consumer and financial stocks that are characterized by high dividends. The largest positions in the portfolio are Taiwan Semiconductor, Samsung Electronics and Walmart de Mexico.
Concentrated portfolio
Fund manager Xavier Hovasse relies on a concentrated portfolio of 36 companies with the “Carmignac Portfolio Emergents” equity fund: “We prefer emerging markets with solid or improving fundamentals such as China, South Korea or Mexico.” Because of their high valuation, Hovasse is currently underweight Indian stocks in the portfolio .
Equities from Eastern Europe play no role in Hovasse’s portfolio. Chinese stocks have the largest share with 41 percent, followed by South Korean with 17 percent and Brazilian with 14 percent. The largest positions in the portfolio include Samsung Electronics and battery manufacturer LG Chem.
An alternative to actively managed funds are exchange-traded index funds (ETFs), for example on the MSCI Emerging Markets stock index. It is made up of companies from 24 emerging markets. At 30 percent, stocks from China are most strongly represented. This is followed by companies from India with a share of 14.8 percent and from Taiwan with 14.4 percent.
Compared to actively managed funds, ETFs are cheaper. Such as the “Lyxor MSCI Emerging Markets Ucits ETF”. It has running costs of just 0.14 percent. With the ETF, investors achieve the return of the MSCI Emerging Markets index.
Even though emerging market stock markets have posted strong gains in recent months, valuations are still well below those of established market stocks. These are valued at an average price-to-earnings ratio of 16, compared to 11 for emerging market stocks. The cheap valuation coupled with good growth prospects speaks for exposure to emerging market equities.
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