Many investors now have dedicated equity exposure to China. A growing number of them have expressed a desire to treat China separately when allocating to emerging market equities. This isn’t out of the ordinary: large individual markets are often removed from regional equities as they grow. By investing in an emerging market ex China fund, investors can achieve greater country and sector diversification, while reducing the specific political, regulatory and geostrategic risks associated with investing in China.
Beyond the shadow of China lies a diverse opportunity set: each country comes with its own idiosyncrasies and inefficiencies, providing fertile ground for active stock pickers like us.
We tend to initiate positions in stocks temporarily out of favour, which increases the potential rewards without relying on undue optimism. We target a double-digit annualised return from each stock we buy, as we ride the transition from contrarian to popular.
We seek to buy companies for less than they are worth and spend most of our time evaluating their ‘fair value’. Our valuation-led approach incorporates rigorous fundamental analysis, meaning we can identify the likely sources of mispricing and how our views differ from consensus.
We favour net cash balance sheets as a form of insurance, should the investment case not play out as anticipated.
The team has been successfully investing in Asian and emerging market equities for over 20 years. James McDermottroe and Charles Bond manage the fund’s stock selection. They have a combined investment experience of more than 25 years.
Emerging market equities offer a substantial opportunity set for active investors – with or without China.
James McDermottroe
Fund manager
Chinese equities have taken an ever-greater slice of the emerging markets pie over the years. While only around 5% of the MSCI Emerging Markets index consisted of Chinese equities 20 years ago, they make up around 27% of the index as at December 2024.
China’s growing dominance in widely followed emerging market benchmarks has caused investors to worry about concentration risks. Combined with investors becoming more wary of China-specific risks, this has fuelled demand for products that can limit their exposure to the world’s second biggest economy.
Historically, a growing middle class has been a strong indicator of a country’s future economic growth. As the middle class in emerging market countries expands, companies are expected to benefit from growing consumer purchasing power and shifts in spending patterns. Moreover, emerging markets are trading at a significant discount relative to developed markets and world markets, buoyed by strong fundamentals and a number of economies that are at an early stage in their cycle.
You can invest in emerging market stock markets by investing in actively managed mutual funds or exchange traded funds (ETFs). Invesco offers a broad range of actively managed funds and ETFs.
