CIO Outlook: Tailwinds for Emerging Markets

As a new year approaches, we naturally start thinking of the future and asking ourselves: “How might things be different?” I often think that a little strange—what makes January so different from December? To anticipate change, we have to look out a little further than a few months. More of the same is always a good first estimate. But who can bear to even think that way this year? Not me, for sure. And to be honest, this year there is more reason to think that even in the short term there could be some pretty significant changes in Asia and emerging capital markets.

Let’s start with the U.S. presidential election. We have had a chance to see some of President-Elect Biden’s early appointments and his mindset is clear—he will draw from academia and on people with experience. This suggests that he wants to set a tone that is more similar to that of the Obama administration. People with these backgrounds are not likely to pursue confrontational policy with China. Rather, they may try to work with or persuade China. They will not easily distill down all of America’s perceived problems to “the trade deficit” but likely have a more nuanced approach to economic relations and bilateral trade. Indeed, the incoming Biden administration seems to show a desire to mend fences with Europe—one relationship that was a casualty of the past four years. Why is this important for Asia? Well, it strongly suggests that the policy toward China will change, that the new administration sees trade not as a war but as an exchange. The shift of U.S.–China frictions may move from dollars and cents to human rights issues and diplomacy. Europe is by no means anti-China; indeed parts of Europe have benefited from Chinese infrastructure spending. Europe’s own inability to harness its fiscal power to help weaker states gave China a diplomatic advantage in places like Italy and Greece. European countries are not as implacably opposed to a strong China.

More important than trade will be understanding China’s domestic demands because that is what drives its economy. Human rights may become more prevalent as a concern in international relations across the pacific. This has certainly been a theme of the U.S. democratic party in the past and was an area sometimes ignored in recent years. China can be very prickly on this issue. The Hong Kong Security Laws are probably not open for debate, after all. In addition, I suspect the treatment of the Uighur ethnic group in the Northwest of the country is not going to be open for discussion either. However, China will be more receptive to other issues of human rights—housing, health care, the environment. These issues are becoming increasingly important to its people, who have enough material possessions to care now about quality of life issues. China can surely be pressed on its global responsibilities in this sense because it sees them as being in its own self-interest. This means we can expect more regulation and legislation to limit environmental damage and to improve access to health care solutions for the majority of the population. Some of these will increase risks to business and may reduce profitability; others will be opportunities for businesses to facilitate social aims profitably. Furthermore, it may not be just China taking its cue from the West. For China has itself done more to try and lean against income inequality over the past decade. Perhaps the U.S. and Europe may pursue some of China’s minimum wage policies? Overall, these areas, whilst they pose diplomatic problems of their own, are less directly aimed at causing economic disruption. Moreover, a greater focus on spreading further the benefits of a wealthy society argues for further development of capital markets and corporate governance that will increase the opportunity set for us, too.

Social and environmental issues are also coming to the fore when investing in China, Asia and many of the emerging markets. This is not primarily because of demand from Western investors, as one might suspect. Rather, the demands are coming from the citizens of these countries themselves. Having grown from subsistence levels of development to the middle class, people value a clean environment, better health, a feeling of social justice. We are seeing this in regulations to develop health care systems, in policies to deal with income inequality, and even in government action to deal with monopoly power in new industries. Populations as well are seeking the same kind of financial freedom that we enjoy in the U.S. and Europe: this means developing trust in capital markets and pushing for better corporate governance. Some markets, such as some of the developed markets of Asia (Hong Kong, Singapore, Japan) have made great efforts in this regard. In Latin America, too. Markets like China have perhaps the furthest to go in this regard, but also the most to benefit as they seek a firm foundation for the development of insurance and pension systems as well as a way to maintain growth in the economy at higher levels of consumption and less investment.