While China’s presence on emerging market indexes may be shrinking, the case for investing in it remains compelling, said Vivian Lin Thurston, a partner and portfolio manager for emerging markets growth at William Blair Investment Management, during a session at the Canadian Investment Review’s 2023 Global Investment Conference.

“China now accounts for approximately 31 per cent of the MSCI EM index. It’s down from a peak of about 43 per cent, but remains the highest weight country in the index.”

Despite recent concerns about its near-term outlook, Lin Thurston said the fundamentals of China’s economy remain attractive in the medium to long term. “The primary economic driver is a growing middle class — that’s the key basis, but a few other important investment themes are also emerging.”

Read: 2022 IIC coverage: Finding differentiated sources of growth and alpha in emerging markets

The transition away from fossil fuel reliance and demographic shifts are already reshaping the country’s economic position, she noted. “China has become one of the leaders in the global energy transition mega trend, such as in electric vehicles and solar power. Currently, EVs have about 25 per cent penetration there — up from six per cent in 2019. The government’s current goal is to reach 60 per cent before 2030 and it’s probably going to get there a little early.”

China isn’t the only emerging market economy carving out a name for itself as a technology leader in the region. “South Korea and Taiwan have positioned their economies in the centre of the global semiconductor sector,” said Lin Thurston. “That tells you Asia is still the centre of the opportunity set for EM.”

The emerging technology and renewables sectors are highlighting another transition occurring within China’s economy, she said, noting that, while most of its traditional businesses — like its troubled real estate industry — developed under supply-centred models, newer businesses are developing in a demand-driven landscape. “That also encompasses the internet-related e-commerce, social media and advertising sectors. . . . We continue to see attractive bottom-up investment opportunities in those.”

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Lin Thurston made it clear that, despite the strong case for investing in the Chinese economy, there are still significant risks for defined benefit pension plan sponsors and other institutional investors to consider. “You hear a lot about de-globalization and the worsening U.S.-China relationship. I think [both governments will] keep going down that path [of increasing tension]. . . . Because of that, though, it looks like Chinese equities are pricing this into their risk premia.”

She also noted investors have become increasingly concerned about internal risks facing businesses operating in China. “[It’s] basically a top-down authoritarian governing system — one that’s never been done alongside a capitalist system before. . . . Going forward, that task is getting harder. Economic and political reforms need to continue if it’s to strike the balance.

“As a fundamental investor, I’ve seen the political developments over the last 25 years — but, at the end of day, the best companies prevail,” she added.

Read more coverage of the 2023 Global Investment Conference.