Q2 2023 CIO Review and Outlook

CIO Robert Horrocks, Ph.D., says peaking interest rates may strengthen the case for quality growth stocks in emerging markets.

Key Takeaways

  • If the Fed achieves a soft landing, an economic cycle more tilted to growth may play out to create a tailwind for emerging markets.
  • As geopolitical tensions stay on the table, investors will increasingly need to leverage the powerful domestic drivers of emerging markets.
  • The sheer size of China’s market means it remains a significant long-term opportunity, one where short-term skepticism can lead to good prices for good businesses.

Interest rate cycles are driving changes in short-term sentiment these days and U.S.-China politics seem to be determining the longer-term mood. In the last quarter, it was particularly apparent that neither seem to be working in favor of emerging markets. For many investors, it’s been a signal to sit it out on the sidelines.

Clearly, elevated global interest rates do pose a challenge to the outlook of a growth-orientated asset like emerging markets and geopolitics have weighed heavily on Chinese stocks and on companies in the semiconductor space. Underneath it all, Asia and emerging markets, particularly China, have simply struggled to produce the per-share earnings growth that their economic growth deserved. Meanwhile, markets like the U.S. have been outperforming consistently.

So you could be forgiven for questioning the rationale for staying invested in emerging markets, particularly as China labors in its recovery. Our economic theory and stock-picking patience have certainly been tested recently but we remain convinced of the long-term opportunities of this asset class. Here’s why.