9 | 2023 Investment Outlook | December 12, 2022 EMERGING MARKETS Opportunities in Emerging Markets, Navigating Beyond China KEY POINTS Emerging markets (EM) have better growth, lower inflation, and less sovereign and 1 private debt, yet EM equities and currencies trade at crisis-level valuations. Jitania Kandhari Deputy CIO of the Despite the slowdown in China, we expect many other EM countries to see an Solutions and Multi- acceleration in growth, which will drive earnings and market share. Asset Group, 2 Co-Lead Portfolio Manager for Active The growth story is underpinned by the post pandemic recovery, a manufacturing International 3 renaissance, commodity tailwinds, digitization and a favorable political cycle. Allocation, Head of Macro and Thematic Research for We believe that most investors are under-allocated to EM, considering the potential Emerging Markets 4 returns from this asset class. Equity During the 2010s EM equities suffered their worst performance as an asset class going as far back as the 1930s. Fast forward 10 years and most emerging countries, with the exception of China, started the 2020s in much better shape economically than in the previous decade. Emerging Countries such as Brazil, Mexico, India, Indonesia and the GCC (Gulf Cooperation Council) outperformed not only the MSCI Emerging Markets Index but even the S&P 500 Index in 2022. Several factors have contributed to this outperformance. The headwinds of the past are becoming tailwinds that we believe should provide support for many years to come. ƒ Relative growth differentials favor EM equities. ƒ EM sovereigns are healthier compared to developed markets (DM) governments due to better public debt and fiscal situations. ƒ EM corporates are in better shape compared to DM corporates due to deleveraging. ƒ EM external balances have improved relative to DM. ƒ EM equities and currencies are trading at decade-low valuations. Navigating beyond China Growth in China will be weighed down due to its high debt, slowing working-age population growth and declining contribution from trade. In the 2000s, China became the manufacturer to the world, and in the 2010s, China’s economy grew thanks to consumer Internet service giants. We believe the next turn in this decade will be toward green technology and science-based industries like semiconductors, artificial intelligence and high-end manufacturing. Despite the slowdown in China, we expect many other EM countries to see an acceleration in growth, which will drive relative earnings and market share.