From Flat Whites to Flights to Cars — China’s Shift to a Consumption-Based Economy Is Well Underway
Concerned that the “emerging markets story” is over? Sharp declines in China’s stock market, plummeting commodity prices and the prospect of higher U.S. interest rates has left some investors feeling unsettled. And yet, while these are significant developments and sources of near-term volatility, for longer term investors there are still many attractive opportunities across stock and bond markets in developing nations.
For example, China’s transition away from investment-led growth toward an economic structure more reliant on consumption is well underway. So while the overall pace of economic activity has slowed, Chinese consumers have continued to serve as a source of earnings growth for many domestic firms and multinationals.
Higher U.S. interest rates could initially dampen demand for emerging markets assets, but it’s important to note that emerging markets may have already made significant adjustments to tighter Fed policy. In many markets, stocks have moved lower, bond yields have risen and, significantly, currencies have depreciated.
Generally, valuations appear attractive, with forward price-to-earnings ratios below historical averages. Our research suggests pockets of attractive return potential continue to be evident across emerging markets in sectors offering high-growth such as Chinese Internet firms, as well as more defensive areas such as health care companies.
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