Economist Andrew Hunt's concerns about China's policy constraints and shifting capital flows paint a challenging macro picture and in the past when the U.S. sneezed Emerging Markets caught pneumonia. Then in the GFC China bucked that trend by pushing the $1.5 trillion spend button. However, this time is different again. Chinese manufacturing PMI remains in contraction, fiscal spending is down sharply year-on-year, the PBOC is becoming more cautious, and credit expansion has been weak. Yet there's an irony embedded in this story: the very scenario Hunt envisages—where Western AI valuations face a reckoning and capital flows become more erratic—may actually favour emerging market equities, particularly those focused on domestic consumption. It was therefore natural for us to triangulate with ‘our people on the ground’ to look at the implications for emerging market portfolios and in this week’s What We Are Working On video with Tassos Stasopoulos of Trinetra Investment Management.  

China: A Stock Picker's Market

The easy money in Chinese equities has been made. The broad thematic trade that worked so well when stimulus expectations lifted all boats is now behind us, with many household names like Tencent and Alibaba up 50% from their lows. But according to Tassos this doesn't mean opportunity has evaporated altogether, it has simply become more selective.

Consider the divergence within sectors. In cosmetics Tassos cites Shanghai Chicmax (yes really) has risen 200% over fourteen months while market leader Proya is flat. Same consumption category, vastly different outcomes. The difference lies in understanding shifting consumer behaviour, particularly among younger Chinese who are seeking emotional fulfilment and value-driven products rather than simply trading up to premium brands.

Similarly, H World (hotels) continues to deliver strong earnings growth despite  a supposedly weak consumer backdrop. Budget hotels offering quality experiences are gaining market share as consumers prioritise experiences over possessions. These are idiosyncratic stories that ethnographic research can uncover and they're largely immune to the international capital and monetary trends that have traditionally afflicted export oriented emerging market companies.

The AI Angle

Here's where the narrative becomes particularly interesting. Hunt Economic’s  framework suggests the US credit cycle is weakening and the U.S. economy has become (somewhat ironically) dependent on export driven capital outflows from China. Meanwhile western investors have become concerned about AI valuations and the amount of borrowing by big US tech. If that led to a correction, emerging market tech names could actually prove relatively resilient—or even benefit if Western firms are enticed to use more of the cheaper AI tools coming out of China (a trend we are already witnessing).

Chinese tech giants are monetising AI at a fraction of Western valuations. Alibaba's cloud business has accelerated from 4% growth to 34%, with AI-driven cloud now representing 20% of that division. Tencent's advertising business has grown 21% for eight consecutive quarters despite weak macro conditions. These companies control entire ecosystems and are seeing rapid AI adoption among consumers, enabled by dramatically lower inference costs than their Western counterparts. 

This is many ways where U.S. big tech was a few years ago and now the building blocks are the same as those commanding premium valuations in the U.S.—cloud computing, AI integration, digital payments—but the price being paid is materially different.

Diversification Still Works

Beyond China, the emerging markets universe offers genuine diversification. Brazil, despite interest rates at 15%, presents opportunities in quality staples generating strong cash flows. Indonesia offers exceptional value, with companies like Bank Rakyat trading on 10% dividend yields. India remains expensive but financials look well-positioned as regulatory constraints ease.

Critically, these domestic consumption stories, whether it's Apollo Hospitals in India, Titan selling jewellery, or Cisarua Mountain Dairy selling dairy products in Indonesia, are largely insulated from tariff noise and geopolitical friction. They march to their own tune.

The Risk-Adjusted Case

Lastly Trinetra maintains that risk-adjusted returns for quality emerging market portfolios remain well above historical averages. Through the 2010s, the long-term average sat around 6%. Even after recent gains, current levels around 12.5% suggest the opportunity set remains compelling, perhaps not the generational highs of late 2024, but still exceptional by any historical standard. Our numbers are a little more moderate but point in the same relative direction and are of a similar quantum.  

The macro picture Hunt describes is genuinely concerning. But for patient investors focused on domestic consumption themes and willing to do the fundamental work, emerging markets may prove surprisingly resilient—and potentially a beneficiary—if Western credit conditions deteriorate.