Earnings growth in emerging markets should be better than in the developed world as this year progresses, he added, as they are coming up from more depressed levels.
"(Some) reasons behind the recovery of emerging markets include the unwinding of unprecedented quantitative easing, attractive valuations and the re-opening of the huge Chinese economy, following easing of pandemic restrictions, and its gradual return to normalcy," Mr. Abbott said. "The Chinese economy is also modernizing — it's moving away from such things as raw materials, property and construction to more sophisticated, higher-end, higher-returning service and technology businesses."
Mr. Abbott generally thinks India has a strong economy. While inflation in India is higher relative to other Asian states, Reserve Bank of India has shown it can engineer monetary policy without harming economic growth, he said. The underlying strengths in the Indian economy are linked to infrastructure, manufacturing and exports, which have benefited greatly from reforms.
"As many traditional allocations failed last year, the need to diversify an investment portfolio is more crucial than ever and the emerging markets should be an important part of institutional risk-budgets," he said.
Mr. Abbott noted, low correlations enhance the impact of emerging markets allocations — the correlation between emerging markets and the S&P 500 Index reached a four-year low in 2022.
Mr. Abbott estimates that many institutional investors are currently at around a 5% allocation to emerging markets stocks — though many of his institutional clients have been steadily increasing this allocation primarily to strengthen the defensive characteristics of their portfolios and to generate higher returns.
And despite the recent jump in emerging markets stock prices, they still remain relatively attractive. "But the key here is to invest actively with a bottom-up perspective and avoid passive benchmarking," he said. "Matthews makes it a point to meet with companies and their management to determine their individual growth prospects."
However, as ESG concerns have become paramount to many Western investors, some companies in India and China may pose some less-than-stellar attributes, but others present unique opportunities for investment return and impactful investment, he said.
"In India, for example, corporate governance and financial disclosure protocols are not that great, although they're improving, and there are liquidity issues with some mid-cap and small-cap Indian firms," he said. "But overall, the Indian government has enacted many structural reforms, and their economy has made great strides in recent years."
With respect to China, corporate practices there "have improved, but they're not perfect," he said. "We engage in close dialogue with these companies and monitor their progress on many fronts."
Matthews Asia has $13.4 billion in assets under management.
