Japan, China and the broader emerging markets category look attractive
Thursday 25 Apr 2019 Author: Daniel Coatsworth

It’s been quite a whirlwind period since the start of the year with markets racing ahead despite plenty of negative economic news. While we’ve covered many of the warning signs in Shares in recent months, it is worth pointing out not everything is doom and gloom.

Our main feature this week looks at Japan where GDP growth is forecast to improve from 0.8% in 2019 to 1% in 2020, according to the International Monetary Fund (IMF). Optimism is also growing towards China after it released a number of economic, real estate and industrial output data points which imply a stronger economy than previously expected.

And interestingly, Unilever’s (ULVR) first quarter trading update on 18 April showed that its sales growth was primarily driven by emerging markets.

All these factors illustrate the importance of not simply relying on UK stocks for your investment portfolio. Admittedly the UK market is very diverse with many companies earning money overseas. However, it is still worth tapping into specific foreign markets to get exposure to strong geographic territories, perhaps through an actively-managed fund or an exchange-traded fund.

For example, China’s first quarter GDP growth of 6.4% was better than the 6.2% consensus forecast. Retail sales were better than expected and property investment grew at its highest rate in eight months. Industrial production jumped 8.5% in March, the fastest since mid-2014, and driven by infrastructure work and 5G production.

‘Fiscal stimulus and telecommunication infrastructure have supported China’s economy. And as such, the job market should remain stable overall. This has been the government’s primary concern and having achieved this, it can now shift its focus to other areas such as financial stability,’ says ING.

The investment bank has subsequently revised its 2019 GDP growth forecast for China from 6.3% to 6.5% on the back of the first quarter numbers.

The IMF has also recently upgraded its 2019 economic forecasts for China, up from 6.2% to 6.3% – its second upgrade since October 2018.

Against a backdrop of slowing economic growth in many parts of the world, it is important to note that emerging markets is the most favoured investment region for the 239 institutional investors who took part in Bank of America’s latest global fund manager survey.

The bank’s chief investment strategist Michael Hartnett says these fund managers have gravitated towards assets that outperform when growth and interest rates fall, such as cash, emerging markets and utilities. He says they are less keen on assets that require higher growth and higher rates, such as banks.

If you haven’t got decent geographic or asset diversification in your portfolio, now is definitely the time to reshape your holdings so as to be better placed to navigate any setbacks to the market as the year progresses.

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