When consistent losers become winners

History underlines that persistent underperformance over 2-3 consecutive years from either country stock markets or asset classes can subsequently lead to impressive double-digit returns during the following year. Three promising regions and asset classes that performed poorly both in 2021 and 2022 are: i) Chinese equities; ii) Emerging Market sovereign bonds, and iii) Silver. In each case, we see strong fundamental drivers to underpin a sustainable rebound this year.

Key catalysts: energy transition, Chinese stimulus, stronger emerging market currencies

We admit that thus far in 2023, the Chinese post-reopening economic rebound has been patchy. But we expect Chinese authorities to enact further stimulus measures to support the property market and to nudge Chinese growth back towards the official 5% target for 2023. Global investment in the energy transition and the growth in electric vehicle demand are key drivers for relevant Chinese companies.

We see the energy transition as a key demand driver for silver, given its key role in the manufacture of solar panels, which are experiencing exponential growth in demand. Emerging Market central banks are in a good position to cut reference interest rates sooner than those in developed markets as they were quicker to initially raise rates in response to rising inflation. We continue to recommend exposure to EM sovereign bonds, given a 7.4% yield for the Bloomberg EM Bond (local currency) index and the potential for Emerging Market currency appreciation as inflation rates fall.