China still positive despite unrest

There is a strange tug-o-war occurring in Asia at the moment. On the one hand every man and his dog is trying to tap into the wonders of China as an emerging market, and on the other there is mayhem as one of the nation's major financial hubs suffers as protests plague Hong Kong.

So, does this create an opportunity to access the Chinese market or is it a sign for retreat?

Damien Buchet, chief investment officer at Finisterre Capital believes despite the unrest in China there are signs of growth stabilisation coming from EM.

"Against a broad US economic momentum slowdown, and question marks over Northern Europe including in Germany, EM and Chinese indicators have been stabilising. This may project a diminishing growth gap between emerging and developed markets, which should support EM currencies versus the US dollar for a while," Buchet says.

"Considering the relative value between developed and emerging markets, what strikes us is that, with yields having turned negative in $12 trillion of government bond markets globally, emerging market bonds remain quite attractive for investors, despite lower absolute yields than in early 2019."

There is no doubt that China has experienced phenomenal economic growth over the past few decades, so one has to wonder how much more can be expected in the years to come.

If you ask Australian companies, it's a lot.

In November, China's largest company Alibaba held its annual Singles Day event. Much like Black Friday or Boxing Day, discounts are offered site wide, while consumers are encouraged to celebrate being single by buying as much as possible.

This year the event brought in around US$38 billion. The US$1 billion milestone was passed in just one minute and eight seconds.

If this proves anything, it is that the growing middle-class in China is cashed-up and ready to spend, giving EM investors a positively glowing outlook.

Alibaba's Australia and New Zealand managing director Maggie Zhou says business with Australian companies has risen 35% year on year.

"At Alibaba we are dedicated to helping organisation of any size easily do business anywhere," Zhou says.

"[The festival enables] merchants in Australia and around the world to grow their businesses by leveraging our well-established ecosystem, insight-driven product innovation and content-driven user engagement."

For example, Bubs Australia founder and chief executive Kristy Carr says: "It had been a personal dream of mine to take the brand to China. Since entering the Chinese market we can barely keep up with the trajectory the business is now on."

However, the growing uncertainty surrounding Hong Kong and the trade war has some investors spooked.

Speaking at the Fidelity Emerging Markets Forum in Sydney, Catherine Yeung, Fidelity investment director said the ongoing trade war will create further volatility.

"This doesn't mean that the region should be discounted. China has created an enormous supply chain that cannot be ignored, but it is an inconvenient investment truth that volatility will continue," she said.

The trade war has had noticeable impacts across emerging markets, most significantly through lower exports and the retrenchment of corporate investments.

"There will be no real winners in the trade war. The relationship between the two nations has become less co-operative and more confrontational," Yeung said.

Buchet believes that in line with what has been seen in the wider global environment, business leaders in emerging markets also demonstrate hesitation to push forward with investment decisions.

"Since the summer the emerging market landscape seems to have slowly adapted to this new reality" he says.

"Global yields have come down much more than most people expected this year, led by US treasuries. It's been a duration rally which has effectively rekindled risk appetite globally, and of course emerging markets typically benefit a lot from those periods of monetary easing, as capital floods back in."

Still, Buchet believes growth is coming back to emerging markets.

"Regardless of if a deal goes through or not this year, we see green shoots of growth coming back to emerging markets, but a US-China trade deal will be decisive in shaping the outlook and prolong the recent rally in asset prices."

Read more: AlibabaHong KongFidelityDamien BuchetBubs AustraliaCatherine YeungMaggie ZhouFinisterre CapitalKristy Carr
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