Chinese equities and EM bonds look attractive

Aberdeen Standard Investments has expected structural growth in Chinese equities and emerging market (EM) bonds in 2020, as these assets offer diversification and attractive potential risk-adjusted returns.

According to Mark Baker, investment director – emerging market debt at Aberdeen Standard Investments, EM growth remained relatively robust, in contrast to economic stagnation in the developed countries, and he expected the growth differential between EM and developed markets to widen in 2020, driven by economic recovery in a handful of large emerging economies.

“There is scope for incremental policy rate cuts in a number of EM economies including Brazil, Mexico, Indonesia, India and the Philippines.  However, rate-cutting cycles are now at an advanced stage, meaning duration gains may be modest in the year ahead,” he said.

“Closer to home we also see attractive opportunities in Asian local markets, particularly in China and India. Continued interest rate reform will provide a supportive background for duration in China, while Indian local currency corporate bonds offer both attractive income returns and scope for capital gains.”

At the same time, the major headwinds for investors in EM included further dollar strength, the continuation of US exceptionalism, a deeper Chinese slowdown and an escalation in trade tensions.

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As far as China was concerned, Aberdeen’s head of China equities, Nicholas Yeo, said that despite 2020 starting with a fairly positive a fairly positive backdrop for equity markets including the soon-to-be-signed US-China phase one trade agreement, more monetary stimulus from the PBOC, and indicators pointing to stabilisation of Chinese economic growth, the volatility would still remain in play given potential economic and political obstacles to a more comprehensive US-China trade deal.

“Against this backdrop, we observe that domestically focused Chinese firms are better insulated from a possible deterioration in trade relations or global growth.  China’s huge domestic economy will remain well supported by rising wealth and consumption as well as targeted monetary and fiscal stimuli,” he said.

“The spending power of China’s fast-growing middle classes will continue to drive local company revenues and profits.  This will translate into investment opportunities.  

“We see continued growth in the high-end food and liquor, travel, health care and life insurance sectors.  With an overall robust company earnings outlook, A-share valuations appear relatively attractive too.”