Assessing the Investment Landscape in China
China's economy is following a path that is quite distinct from other emerging markets. Understanding the risk/return characteristics that define that path is key to thinking through the inclusion of Chinese assets in an institutional portfolio, including the consideration of a dedicated allocation to China.
Market Outlook
Key Takeaways
China’s size and share of the global economy make it impossible to ignore; China’s growth story will continue, although that story is changing and becoming more complex.
We believe that China's government remains committed to supporting growth as it navigates China's transition to a developed market.
Investment in China remains a unique and compelling opportunity to capture returns, even in light of slowing absolute growth and a unique set of risks.
Investment Perspectives
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Key Takeaways
Given China's idiosyncratic path compared with other emerging markets, the ongoing evolution of its growth story and associated return opportunities, and the unique risks involved, investors would be well-served to give particular, dedicated consideration to China investment.
Taking full advantage of the China growth story in equities requires the active identification of key opportunities – and crucial risks; in this unique market, many investors would benefit from making a separate allocation to China.
China’s fixed income market represents an intriguing opportunity to enhance the yield potential of investors’ portfolios; investors are increasingly making the transition from “How?” to “How much?” when considering an allocation to China bonds.
EM growth should, on average, outpace developed market growth. However, to be successful in EM investing, one must look beyond China. EM economies are diverse, and this offers several opportunities for investors looking to diversify.
Three concerns are shaping our view on EM equities as we head into the final quarter of 2021. First, China growth concerns are increasing as the global economic recovery peaks; a slowdown in China could create additional headwinds for emerging markets. Second, new downside risks to growth in China have emerged, including regulatory risks, and it is increasingly important to understand which sectors and companies will win in the long term as the government pursues key policy goals. Lastly, monetary policy normalization, especially quantitative easing (QE) tapering, is likely to create a liquidity-withdrawal headwind for EM; it should not, however, result in the same degree of downside for EM assets as the 2013 “taper tantrum.”
As quantitative investors, we focus on keeping a balance between the various elements that drive markets. In early 2021, China consumer stock prices and EPS estimates began to diverge.
Explore additional State Street Global Advisors insights on investing in China and Emerging Markets.