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Quarterly Outlook

GLOBAL GROWTH  |  emerging markets  |  october 2015
As Macro Economy Founders, Chinese Consumers Go Shopping

Selective Long-Term Investors Should Still Find Attractive Return Potential as Economies Diverge

“Wages continue to grow on average 5%–7% per year on a nationwide basis, and are still growing in some regions and sectors 10%–15% per annum, even in the current slower growth environment. This puts money in the pockets of the masses. Even though luxury goods consumption has fallen sharply, mass market consumption is still quite healthy.”

Andrew H. Dougherty China Affairs Specialist Beijing office 11 years of experience (as of 12/31/15)

From Flat Whites to Flights to Cars — China’s Shift to a Consumption-Based Economy Is Well Underway

Sources: Energy Information Administration and Short-Term Energy Outlook, World Bank, FactSet; China Association of Automobile Manufacturers. Auto sales are unit sales for rolling 12-month periods.



Concerned that the “emerging markets story” is over? Sharp declines in Chinas 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, Chinas 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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