Equities: A new playbook for a new era

[00:00:06.83] We think the outlook has brightened for emerging markets (EM), supported by a favorable policy backdrop, commodity exporter tailwinds, and China's reopening. While risks remain, including the potential for geopolitical tensions to escalate from here, we see opportunities to re-risk through selective EM equities. January recorded the highest monthly inflows into EM equity ETPs globally in a year, building upon a record-breaking year in 2022, with US$110 billion of inflows despite broad risk-off sentiment. This robust flow picture adds conviction to our relative preference for EM over DM (developed market) equities, although we do remain neutral overall, acknowledging headwinds from a challenged global growth picture. 
[00:00:57.35] So where do we look for opportunities in EM? The most significant tailwind in 2023 so far has been China's reopening, with a pickup in demand supporting China-exposed equities in markets from Korea to Brazil, as well as sectors in Europe like consumer discretionary. We believe that EM Asia could be the largest beneficiary of China's reopening. So to talk more about the outlook for China and EM Asia, I'm joined by my colleague Thomas Taw, head of iShares Investment Strategy in the APAC region. Tommy, over to you. 
[00:01:35.38] THOMAS TAW: Thanks, Karim. The MSCI Emerging Markets Index is now composed of roughly 75% Asian underlying exposures. That's a huge proportion. Investors who have moved into broad EM are now asking if they should look at single-country exposures to complete their core holdings in emerging markets. Our APAC single-country outlook for Q1 uses a framework of analysing which economies are the biggest net beneficiaries to China's reopening, while also keeping an eye on geopolitical tensions and inflation concerns in the region. 
[00:02:03.84] Now, broadly, we found that inflation for the majority of economies in Asia is within their respective central bank parameters, and we see the rate-hiking cycle ending earlier here versus countries like the US. We like South Korea because of its high exposure to China trade, appealing valuations, and relatively benign inflation dynamics, for example. 
[00:02:23.34] Since China's faster-than-anticipated shift away from its strict Covid-zero policy and the subsequent reopening of the economy, we've seen a strong return of capital inflows for both equities and bonds. With reopening largely done now, however, do we think the picking up in recent sentiment is sustainable? So to answer that, we take a look at flow and positioning. January was a record month for northbound Stock Connect flows. That's foreign investors buying into mainland stocks. January was also the third consecutive month of clients increasing exposure to both onshore and offshore China ETFs. We think this is a trend that is set to continue, as foreign investors have consistently decreased their portfolio weights to Chinese equities over the past two years. 
[00:03:03.97] Furthermore, Chinese household savings have now reached nearly US$150 billion. A strong economic start to the year could drive the next leg of capital inflows. And we see China delivering circa 6.1% GDP growth for 2023, above the consensus level of 5.5%. Overall, it's been a strong start to the year for sentiment towards Asia. And though investors should be aware of idiosyncratic risk and a higher risk premium attached to elevated political risks, we see room for Asian equities and fixed income to hop further into the year of the rabbit.