Eastspring Investments believes that valuations are supportive for Chinese equities in 2025, despite potential tariffs being imposed by the US, with potential for additional fiscal stimulus buoying the largest emerging market (EM), according to Eastspring Investments portfolio manager, Navin Hingorani.
“Noting the equity market rebound since September, China’s economic and financial market stability is supported by the potential for greater levels of government stimulus, cheap valuations, and low institutional ownership despite the economic challenges of recent times.
“China offers investment opportunities due to its current market distress and potential for future growth, especially in consumer-driven sectors,” Mr Hingorani said.
“While the last 20 years have been investment led, we think the next five to 10 years will be consumption led and will offer investors many interesting investment ideas. The Chinese consumer has got the highest savings rate in the world, so they’ve got the ability to go out and consume. While we are waiting for greater levels of consumer confidence, we certainly see very good opportunities in the Chinese consumption space for investors.”
More broadly, Chinese equities are cheap and rising allocations from institutions could support prices in 2025.
At a 12-month forward price-to-earnings ratio of 9.8x (end of November 2024), the MSCI China index is trading at a discount relative to its history. Mr Hingorani sees this upside despite the challenges facing the Chinese economy, including a weak property market and low consumer confidence. However, more stimulus from the government could lift investor sentiment
Turning to EMs beyond China, Mr Hingorani pointed to rising opportunities in India, Vietnam, Mexico, and other countries benefiting from global trade shifts and a potential trade war between China and the US. US market dynamics and the possible effects of a Donald Trump presidency and trade tariffs could make some EMs more volatile, but it is important to think about risk symmetrically and consider the potential for reduced interest rates which would benefit EMs and offer potential upside risks.
“While there has been talk of tariffs and a stronger US dollar, which would be negative for EMs, much of that news has already been priced into EMs since the election outcome, with US markets having outperformed. Now, we are focusing on the positives for EMs, including the potential for lower interest rates.
“In addition, we think that there is upside risk for EMs as perhaps tariffs won’t be as high as people have spoken about, as the last thing that the US needs right now is inflation to rise because of tariffs. Furthermore, from a valuation viewpoint, EMs are trading on much lower valuations compared to developed markets which could draw investor attention.
“Allocations in global mutual funds to EMs have been declining in recent years with many drawn to US markets, which has pushed down their price relative to developed markets. So relative valuations are now very attractive to investors, and EMs now represent an important value and diversification opportunity for investors as EMs often behave differently to developed markets,” said Mr Hingorani.
