Grant Webster

Conflict-related commodity market disruption is just the latest in a series of shocks testing policymakers and unsettling investors. Yet a familiar pattern is playing out in markets.

Grant Webster, Co-Head of EM Sovereign & FX: “Historically, EMs have borne the brunt of supply shocks, but in recent years resilience has become a more common theme. From the post-COVID energy/inflation shock to last year’s trade tariffs and now war in Iran, the initial EM sell-off has been brief and EM outperformance has ensued. At the same time, developed markets have faced rising yields and higher volatility, blurring^[1] the traditional distinction between EM and DM risk. Behind this lies relative strengthening in EM, with prudent fiscal policy, healthier current accounts and proactive central banks all boosting resilience. Investors and rating agencies are increasingly recognising these improvements, with the current EM upgrade cycle among the strongest seen in recent decades. Given this relative policy strength and higher real yields, we believe that EMs are better placed to withstand inflation headwinds.”

Looking ahead, the key question is whether renewed supply shocks could trigger another inflationary episode similar to 2022, when inflation peaked at around 8% in EM^[2] and 7% in DM.

Webster continued: “There will be winners and losers, but the backdrop is very different to 2022 when inflation forecasts had already risen sharply before Russia invaded Ukraine. Since February, EM inflation expectations have only increased by c.50bps and while a further rise is likely, high real rates across EM give central banks a lot more room to manoeuvre than their DM counterparts.”

That resilience is also visible at the corporate level, where many EM companies are used to operating with higher rates and inflation than their developed market peers.

Alan Siow, Co-Head of EM Corporate Debt: “Coupled with the strength of activity data we see across much of the EM universe, that means that EM economies should be better placed to deal with inflationary pressures arising from the supply shock vis-à-vis their DM counterparts.”

Broader lessons from the Middle East

The market reaction to war in Iran is also informative through a more regional lens. While Middle Eastern markets initially came under pressure, the reaction proved short-lived. Credit spreads have already fallen back to pre-war levels, credit ratings have been largely unscathed and bond issuance is continuing and receiving strong investor demand.

Victoria Harling, CIO – Middle East and Co-Head of EM Corporate Debt: “The resilience we’ve seen in Middle Eastern markets reflects a macroeconomic transformation: many economies have worked hard to reduce their reliance on oil exports and that’s really paying off.”

The region is also benefiting from efforts to position itself as a strategic commercial and financial hub in an increasingly multipolar world^[3]. Drawing parallels with the City of London in the early 2000s, Alan Siow “Authorities have made it abundantly clear that the region is open for business, and the number of global companies establishing a presence there is rising. At the same time, the region’s bond markets are becoming bigger, broader and deeper.”

Alongside economic reform, the region is also undergoing rapid social and cultural change. Archie Hart, Emerging Markets Equity Portfolio Manager: “From the vibrant social scene in an increasingly multicultural Saudi Arabia to plans for the region’s first casino in the UAE, the Middle East is changing and fast. Coupled with a raft of favourable characteristics – from time zone to connectivity – this is one of the most exciting regions for investors today.”

Energy market dynamics – a structural growth story for EM investors

While the oil price shock is a global challenge, energy market dynamics are also providing a rich EM-centric opportunity set for investors. Rising energy demand is coinciding with constrained and disrupted supply. Crucially, this is coinciding with a clean tech sector transformation. Solar modules, batteries and electric vehicles (EVs) have become the cheapest options available for EM economic and sustainable development, as China’s ambitious manufacturing and deployment rollout has pushed prices down at extraordinary speed.

Matt Christ, Emerging Market Transition Debt Portfolio Manager: “These improved economics have expanded the commercial opportunity set in EM and many of the associated investment opportunities reside in the private credit world. We’ve made deals across the energy value chain – wind power generation in the Philippines, energy transmission lines in Brazil, a renewable data centre provider in Latin America, and Egypt’s first sustainable aviation fuel production facility.”

Private deals in emerging markets also offer investors a favourable risk/return profile^[4], which contrasts with a loosening of underwriting standards in the US. Alper Kilic, Head of Alternative Credit: “Across EM, we’re seeing investment opportunities that tick multiple boxes for investors: exposure to structural growth themes, attractive yields and strong deal protections – on loans to fundamentally strong borrowers.”

AI – a disruptor and enabler

The examples above help explain how the EM private credit opportunity set is inherently heavy-asset, low-obsolescence (HALO).

Kilic noted: “These capital-intensive, physically irreplaceable assets contrast with the asset-light, software services business models that are increasingly prevalent in the US private credit market and appear most exposed to risks from AI disruption.”

In EM equities, too, there are compelling comparisons to be made with the US around AI.

The AI boom increasingly depends on hardware. A small group of EM firms sit at the physical limits of that infrastructure; the “Secret Seven”^[5] may represent one of the most overlooked opportunities in global equities today.

“Against a backdrop of a global shortage of chips, AI-driven memory demand is creating an enduring tailwind for South Korea’s Samsung Electronics. SK hynix is another Korean firm benefiting from the memory upcycle underpinning AI infrastructure spend. Elsewhere, a number of companies are well-placed in the context of Taiwan’s AI-export complex and data centre supply chain demand. Some of these businesses trade at multiples that are just a fraction of the lofty valuations seen in the US today,” said Hart.

Meanwhile, CATL is an example of a listed Chinese company with a true global edge: its EV Qilin battery supports a 1,000 km driving range on a single charge. The pace of AI development in the physical economy in China is also accelerating rapidly, including advances in autonomous humanoid robotics, as evidenced by a robot breaking the human half-marathon record.

Hart: “There are increasing parallels with the dotcom bubble, when EM equity valuations remained relatively low while parts of the US stock market overheated. The years that followed saw strong EM outperformance after the bubble burst. Today, we see similar dynamics emerging, making this the most compelling entry point for EM equities I’ve seen in 25 years.”

Reasons to recalibrate investment views

From a more structural perspective, even as resilience strengthens the risk profile of EM assets, an enduring premium remains.  Siow: “While the EM corporate credit universe is highly diverse and it’s vital to take a selective investment approach, the overall compensation for risk is generous. Across the EM universe, country-specific concerns often overshadow a company’s underlying fundamental strength, pushing yields above those offered by DM bonds of a similar credit quality.”

This phenomenon extends to the private market space.

“In the EM private credit world, the reason for the favourable risk/return profile is an enduring barrier to entry. The inherent complexity of these markets and the years required to build local expertise and origination networks mean competition remains limited, and the premium shows little sign of eroding,” said Kilic.

Taking a wider lens, with Hungarian 10-year government bond yields now within around 75bps of their UK equivalents, there is a strengthening case for taking a more holistic view of global investment allocations.

Jaspal Boparai, Co-Head of UK Institutional: “With supply shocks becoming the new norm, traditional asset class behaviour shifting and old EM/DM distinctions breaking down, investors must rethink how they build resilience and diversification in their portfolios while positioning themselves for a transforming world.”

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Notes:
[1] https://ninetyone.com/en/insights/reframing-fixed-income-the-old-rules-are-no-longer-fixed
[2] Ninety One estimates exclude India (incomplete data set), Turkey (extreme values).
[3] https://ninetyone.com/en/insights/the-end-of-easy-globalisation
[4] https://ninetyone.com/en/insights/private-debt-hidden-strengths-in-emerging-markets
[5] https://ninetyone.com/en/insights/the-secret-seven-undervalued-firms-at-the-heart-of-ai-infrastructure

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Last year highlighted the value of a diversified fixed income portfolio – Chinese government bonds and credit outperformed their large G3 counterparts.

Looking back at 2024, Chinese government bonds delivered strong returns relative to other fixed-income asset classes, with a total return of 6.2%, outperforming US treasuries (1.6%), and the euro benchmark (2.6%). In contrast, the equity market began 2024 on a muted note. Sentiment improved in February when Chinese regulators intervened, sparking a 20% rally over the following three months. However, this momentum quickly faded as China’s macroeconomic data deteriorated through Q2 and Q3, highlighting continued deflationary pressures and weakening retail activity.

In response, the Chinese government introduced a series of monetary and fiscal measures in late September, signalling its commitment to stabilise the property market and support economic growth. This led to a sharp reversal in market momentum, although some gains have since retreated. The MSCI China All Shares Index ended the year up 16.4%, a respectable performance, though not as strong as the rally seen in US markets.

What to expect from policymakers in the coming year

The policy environment in 2025 is expected to remain pro-growth, with further measures such as increasing quotas to address local government debt, easing property restrictions, and mobilising funds for property inventory issues. The market expects an expanded consumption-focused stimulus, including an extended home appliance replacement program and increased social benefits spending.

Siow said: “Reflecting on 2024 from a fixed-income perspective, policy announcements serve two audiences – domestic and international. We are currently witnessing a shift in posture in bond markets. Like the Fed, which signalled a turn by cutting interest rates after a period of increases, China’s policy focus has transitioned toward supporting and stabilising the economy, if not outright stimulating it. This shift is a significant development for investors, signalling a potentially more supportive environment in 2025.”

“The market continues to look for a more substantial, fiscally driven stimulus package, particularly around consumption. Such a package remains uncertain, as it would deviate from past policy norms. During COVID, China was one of the few major economies not to issue direct stimulus payments, shaping market expectations. Investors will need to carefully evaluate fiscal measures within this context,” Siow continued.

Trump’s election and the near-term and long-term implications

During the 2018 trade war, tariffs were smaller in both rate and scope than originally announced, with most impact absorbed through RMB depreciation. Over the past six years, China’s global export share has remained stable, indicating resilience. This dynamic is likely to persist, as ongoing US-China tensions continue to shape the economic landscape.

“Chinese companies have moved up the value chain, increasing self-sufficiency, and becoming more resilient to potential supply chain disruptions. Even before Trump’s re-election, Chinese firms began establishing production bases closer to end markets, e.g., South America and Southeast Asia, providing a buffer against potential new tariffs or trade frictions,” said Ma.

During Trump’s first term, the primary adjustment mechanism for emerging markets was through the FX channel, likely to play a key role again. After his victory in November, US treasuries were hit hardest, however, currencies of countries most exposed to tariffs, like Mexico and China, remained relatively resilient.

Ma added: “From an emerging markets perspective, much of the potential risk appears priced in. While the trade war headlines were alarming, global trade’s fundamental shape remained largely unchanged. Although China’s direct exports to the US declined by 30% over the last decade, exports to intermediate countries like Vietnam and Mexico increased, reshaping trade flows and underscoring global trade resilience.”

Exciting opportunities heading into 2025

“Last year highlighted the value of a diversified fixed income portfolio. Chinese government bonds and credit outperformed their large G3 counterparts – US and euro bonds – in a year marked by significant global events, including more than half the world going to elections, including the US. Chinese bonds have proven crucial as diversifiers, and we see value in US dollar-denominated Chinese corporate credit, particularly in investment-grade and selective high-yield opportunities,” said Siow.

Ma said: “In the equity space, we continue to find a variety of stocks with idiosyncratic investment drivers. For example, high-quality, high-growth opportunities in sectors like technology and healthcare, along with value in stocks offering strong cash returns, particularly in raw materials and financials. Our focus is on companies with strong earnings power and positive momentum, spanning both onshore and offshore segments of the China market.”

“We are taking advantage of opportunities in areas such as power grid investments, construction machinery and consumer-focused companies gaining domestic market share or competitive in the export market, particularly those exposed to non-US markets for growth. We see potential along the electric vehicle (EV) supply chain, an area poised for sustained structural growth in China and globally, with the Chinese equity market offering a wealth of names to choose from,” Ma added.

Potential risks in the Year of the Snake

China’s road to reflation is anything but smooth, with persistent deflationary pressures and uncertain duration. For recovery, companies need reduced pricing pressure and improved profitability. The corporate sector growth must regain momentum, and earnings revisions among listed companies must stabilise and shift towards a positive trend.

“Heightened geopolitical uncertainty in 2025 may create volatility in equity markets, with fragile sentiment. We believe in a blended investment style, focusing on bottom-up, individual stock selection as the best strategy for long-term performance,” Ma remarked.

Siow said: “ In fixed income, we anticipate headline-driven volatility, similar to Trump’s first presidency. While market reactions may be significant, much of the risk could already be priced in. Based on experience, the impact may be less severe than initial concerns suggest. We plan to use market dips as opportunities to add exposure, focusing on local currency and dollar-denominated instruments across investment-grade and high-yield segments.”

China presents immense opportunities but realising its full potential requires a thoughtful and intentional approach. The Year of the Snake represents reflection, growth and making calculated decisions in the face of unpredictability – precisely the approach to take as we enter this new year.

By Wenchang Ma, China Equites Portfolio Manager and Alan Siow, Co-Head of Emerging Market Corporate Debt.

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