Alger Emerging Markets Outlook

OUTLOOK 6/8

Since the CPC meetings, a new State Council Financial Stability and Development committee was launched, new regulations on asset management products were issued, rules for online micro lending were announced, and various government entities have told provinces to stick to their property tightening measures.

While the country’s overall strategic focus is likely to remain on large policies such as One Belt One Road (OBOR) and “Made in China 2025,” policy makers are also focused on financial deleveraging, enforcing antipollution measures, and tackling the housing market. Property prices were more resilient in 2017 than expected and we believe the country’s actions to reduce real estate speculation will be an important theme this year. Property taxes continue to be introduced in various forms across different municipalities. A nationwide property tax remains possible. Since the CPC meetings, a new State Council Financial Stability and Development committee was launched, new regulations on asset management products were issued, rules for online micro lending were announced, and various government entities have told provinces to stick to their property tightening measures. China has seen accelerating divergence between its rural and urban areas, especially with the concentration of wealth along its Eastern seaboard. President Xi wants to narrow the wealth gap by 2035. Meanwhile, Xi’s anti-graft campaign is helping to consolidate power and is seen as targeting Communist Party officials who have enriched themselves at the expense of the country and the Party. Over the last five years, his campaign has resulted in the dismissal, sanction, or other forms of punishment of more than 15,600 officials across provincial, municipal, and county levels of government. Some 58,000 additional individuals have been referred for further criminal investigation. Consumption continues to be a bright spot in the Chinese economy. Offline retail sales have continued to growmore than 10% year over year with private consumption currently accounting for over 40% of GDP. It is expected to climb to 50% of GDP in the next decade. Ecommerce is also growing, having increased more than 30% year over year in every month of 2017. Chinese consumer confidence in 2017 reached its highest level since October 2014. China’s rapid growth and development have caused significant environmental damage. At the 19th Party Congress, President Xi devoted an entire section to the environment and he conducted numerous environmental inspection tours during the year. In August, the Ministry of Environmental Protection launched an aggressive “smog battle plan” and in October, targeted specific cities with an air pollution program. In response, the Hebei province, which produces approximately 25% of China’s steel output, has pledged to cut steel production by half in certain locations targeted by the program. Outlook Earnings growth and improvements in return on equity in emerging markets are being acknowledged by global investors. USD earnings growth in emerging markets in 2018 is expected to once again be stronger than in developed markets. Global economic reacceleration is clearly occurring with concerns now centered on U.S. monetary policy. A steeper than anticipated tightening of monetary policy by the U.S. Federal Reserve that could potentially lead to a massive strengthening of the U.S. dollar could be a negative for emerging markets.