Institutional investors are putting China’s dominance as an emerging market under consideration at a time of economic uncertainty for the country typically known as a staple in the investment category.
The uncertainty stems from several structural issues, such as the combination of an ageing population, high debt levels and weak fiscal status for local governments, said Vivian Lin Thurston, partner and portfolio manager at William Blair & Co., during a session at the Canadian Investment Review’s 2024 Investment Innovation Conference.
Another issue is decreasing consumer confidence, she added. “Because [of having] no confidence, no one wants to buy products, no one wants to purchase houses, no one wants to invest.”
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However, there are some opportunities, with China still accounting for around a quarter of the MSCI emerging markets index — though, at its peak, it represented nearly 40 per cent of the index.
The country’s equity market remains attractive for investors due to supporting valuations, said Lin Thurston. In September, markets rallied following a stimulus announcement by the government, with more stimulus plans expected in 2025.
However, the potential of an economic stimulus package strategy to help move the economy out of its stagnation period won’t be enough, she said, since there’s still a need to stabilize the property markets.
She also suggested the government address youth unemployment, noting she doesn’t foresee a “massive stimulus” being the solution due to continued structural issues like high debt. “In order to reduce social unrest and restore the social stability, you have to give people the opportunity to grow, the opportunity to have employment.”
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Another consideration for institutional investors is significant geopolitical risk, which is impacting China as an investment hub. “It’s not very straightforward, . . . but opportunity is still there on the bottom-up perspective,” said Lin Thurston. “We just need a backdrop to normalize that extent.”
Given Donald Trump’s upcoming return to the White House, she said there’s a low probability of the ongoing geopolitical tension between China and Taiwan escalating to a critical event. But if it were to happen, it would be catastrophic for the entire supply chain ecosystem of semiconductors, she added.
“We know that emerging markets has been the big supplier of the global semi-conductor industry. . . . Now with [artificial intelligence], that growth [has become] even more potent.”
Read more coverage of the 2024 Investment Innovation Conference.