2022 could well be remembered as the year of the reopening trade in emerging markets – when their economies bounce back strongly from Covid-related restrictions. While most developed countries have rapidly vaccinated their populations against Covid and have reopened, emerging countries have lagged. When emerging countries’ vaccination programmes catch up, their economies will reopen quickly, and this could strongly support their stock markets.
As the pace of vaccination increases in the emerging world, local economies will recover and investment sentiment should improve – and the gap in stock market performance will narrow, in our view. In 2021, emerging markets stock markets have underperformed in aggregate compared to developed markets, dragged down by China. By contrast, India, which we have long favoured, has outperformed developed markets on average this year. India took a less restrictive approach to Covid than China, and prioritised reopening its economy. India’s GDP growth in 2021 has been much stronger than China’s, and this is likely to continue into 2022.
China suffered three main headwinds in 2021, all of which we think could abate in 2022: a slowing economy, problems in the property sector, and tougher regulation.
China has deployed one of the toughest responses to Covid in the world, and this decelerated its economic growth. In the third quarter, GDP growth was 4.9% year on year. (At the beginning of 2021 forecasters were predicting above 8%.) We think an increasing number of top Chinese policy makers have become concerned at the economic slowdown, and that China could ease monetary policy in 2022, when the developed world – faced by inflation – is likely to be tightening.
Emerging countries in general have not used ‘helicopter’ money (increased government spending and stimulus) to the extent of Europe and the US and therefore will not suffer the same degree of monetary policy unwinding or fiscal drag as developed countries in 2022, in our view. Headwinds may turn into tailwinds.
That said, we need to acknowledge that the growth model in China has permanently changed. We should not expect GDP growth numbers of 8% again from China. Growth between 4% and 5% GDP would still be excellent for such a large economy – the second largest in the world. Future growth in China should be sounder. It will most likely come with less debt, be less reliant on property investment, and will be more centred on the consumer.
There has been much misunderstanding of China’s move toward tighter regulation in 2021. To see a retreat into some kind of Maoist dystopia would be alarmist. We understand it as part of China’s drive for “common prosperity”. The Chinese administration wants to move away from growth at any cost, toward better quality growth and greater inclusion of all parts of society. This is very good for companies focused on the consumer.
Macroeconomic analysis can only go so far when it comes to investing in emerging markets. Our approach is to search for the very best quality companies within emerging markets, with durable franchises and persistent profits protected by strong moats. Quality businesses are resilient, and less dependent on the overall state of the economy. We look at stocks as businesses and hold them for the long term. As famed investor Howard Marks said: “Performance doesn’t come from what we buy or sell, it comes from what we hold. Our main activity is holding”.
We believe that the great advantage for quality companies in emerging markets is that they enjoy a long runway for strong growth, whereas in developed markets, in many cases that runway has all but ended.
Read more about Jupiter outlook 2002
Asia Pacific for income & growth – but be selective
Why 2022 could be a good year for Chinese equities
Tightening into a slowdown: central banks risk policy mistake
US may set the tone for 2022, but solutions set the pace
A post-pandemic world would mark a new era
The value of active minds: independent thinking
Get in touch
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK. 28311