Remaining optimistic on emerging markets

The year 2023 turned out to be fairly pedestrian in terms of emerging markets’ performance. The asset class was weighed down by China, which recorded its third consecutive year of negative returns.

  • 8 mins

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Latest insights

Given inflation levels are picking up around the world, why is this not a problem in Japan? There are fundamental differences in Japan’s economy to explain this. First, underlying consumption has stood still in the past decade or so.
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The performance of the FSSA Japan Equity strategy has been under pressure year-to-date, driven by a violent style and sector rotation from quality growth to financials and cyclical companies.
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The FSSA Japan Equity strategy declined by 3.0% in December and 18.8% over the month of January, driven first by a sharp “growth to value” rotation and then a sell-off by foreign investors from mid-January onwards. This has been a global phenomenon, with high-valuation growth stocks in most developed markets facing similar sell-offs on concerns about inflation and interest rate hikes.
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In our last client update in February 2021, we discussed the reasons we resisted the temptation to switch into pure cyclicals and so-called “value” stocks — even though we had anticipated a sector rotation in the market (the TOPIX subsequently peaked in March 2021).
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Strategists often argue that Japan is perhaps the most cyclical market amongst the major global economies, with profits highly correlated to global trade. We disagree.
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Looking back over 2020, a challenging year for many reasons, there were two key investment decisions that helped the performance of the FSSA Japan Equity strategy.
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