Countries with low valuations, serious growth potential and those emerging from a period of economic strife are where Matthews Asia chief investment officer Robert Horrocks is focusing his attention.
Emerging markets have had a strong run over the past 18 months as developed markets struggled following both macroeconomic and geopolitical uncertainty.
With the commencement of Brexit negotiations, elections in several key European states and the unpredictable foreign and trade policies of US president Donald Trump, developed markets have proved a challenging hunting ground for investors.
Performance of indices over 1yr
Source: FE Analytics
Indeed, as shown above, the MSCI Emerging Markets index has beaten both the S&P 500 and the FTSE All Share over the past year.
Nor have emerging markets have been free from uncertainty, with tensions surrounding North Korea and potential trade sanctions from the US causing some nervousness among investors.
Below, FE Trustnet looks at the four countries where Horrocks – who also manages the Matthews Asia Asia Dividend and Asia ex Japan Dividend funds – sees the greatest opportunities.
China
The fund manager is keen on China, which he sees as placing itself in the centre of the globalisation trade, noting that the country has been “a relatively fertile hunting ground for ideas”.
“China is one place where you are starting to see an uptick in corporate profits and corporate cashflows while valuations are still pretty reasonable in absolute terms as well as relative to the rest of the world,” Horrocks said.
“The opportunities are pretty broad-based. Generally you are looking outside of the state-owned enterprises and you’re sticking with the consumer-facing businesses or niche industrials.
“Not the big heavy industry but the small- and mid-cap sector and you can get pretty good yields of around 4 per cent with pretty fast growth.
“But I wouldn’t say there’s one particular sector more than any other that is a source of ideas.”
Sentiment toward China was at its lowest at the start of 2016, when fears of a potential slowdown and perceived currency manipulation sent the index plummeting 39.27 per cent.
Performance of index over 5yrs
Source: FE Analytics
However, Horrocks said there are pockets of excitement in the index, which has been steadily rising over the past year.
“One thing that we have found in China is an increasing amount of choice among the ‘A’ shares which might not have been the case five or six years ago,” he said.
A better standard of corporate governance that has materialised over recent years has been the main driver of this.
“They’ve grown up, they’ve understood the businesses and running a business for institutional minority shareholders,” he added.
“Better communication – even in the last 12-18 months the better quality of communication there has been very much apparent
“That added to IPOs and broadening beyond the classic heavy industry - raw materials, commodities, energy and banks that were available in the ‘A’ shares not exclusively but predominantly – that has changed.”
Horrocks is 6.2 per cent underweight to the country in the Asia ex Japan Dividend fund, but still has a 37.5 per cent position and said that “at 45 per cent of the benchmark it is difficult to justify having an overweight”.
Korea
Another country where he sees value is Korea, which has suffered from a negative perception from investors as fears over an escalation of hostilities with neighbouring North Korea have increased.
But Horrocks said there are opportunities in the Korean market, with valuations lower than they have been for a while.
“There are a lot of worries in the market about the missile defence system and relationships with China that hit sentiment but really that’s just short-term political noise,” he said.
“Plus add on North Korea and the issues with that and you’ve had some pretty good prices in the market recently – so that is one area that has been good.”
The fund manager said the issues with North Korea were always present in the background but he ultimately expected China to reach an agreement to contain any further escalation.
Performance of index over 5yrs
Source: FE Analytics
Horrocks noted: “I think you have the Chinese working pretty hard to keep North Korea under control and ultimately what they [North Koreans] want is some kind of compensation.
“Money will change hands but I don’t expect it to flare up beyond what has happened in the past.”
He said overall there are mispricing opportunities in the market that investors would do well to take advantage of.
“You have some good businesses for example some of the cosmetics businesses and household goods businesses that are selling into China got hit pretty hard because of these politic sentiments,” the manager explained.
The country is the second largest weighting in its Asia ex Japan Dividend fund and the third highest in the Asia Dividend fund behind China and Japan.
Thailand
One country he has yet to allocate to is Thailand, which he said he has become increasingly more positive on. 
“Thailand is interesting because it has generally good standards of corporate governance and while it’s had its political ups and downs over the years, it has always managed to emerge quite stable,” Horrocks said.
“A few years ago it had a current account deficit plus a moderately high inflation rate. [If] you look at it now it’s got a current account surplus of about 10 per cent of GDP and core inflation is close to zero.
“So it is one of those places that has gone through a credit cycle it appears, it has squeezed any of the excesses that were in the economy and the currency has been stable.
“It looks like it could be emerging out of the other side so that has been an interesting place to look for new ideas.”
Horrocks has a 1.6 per cent weighting to the country in the Asia Dividend fund but currently has no exposure in the Asia ex Japan Dividend fund.
“I wouldn’t say that we have necessarily been adding to it yet but that’s one area that I think is interesting. It’s one for the future, to start looking at now rather than one that we’ve already allocated to,” he said.
Vietnam
The final country being considered by Horrocks is Vietnam, which he said has some of the best growth prospects in the emerging markets sector.
“Korea-recent is where you are getting some of the best value, Thailand is one for the future to keep an eye on and right now I would say Vietnam is another interesting area for growth,” he said.
“The issue with Vietnam is you have a very young workforce and you have a very disciplined workforce.
“You have a financial and economic system that was centrally planned and is now trying to move away from that but it does mean that commercially-run, highly-focused businesses are relatively hard to find in the listed market space.
“But where you do find them they tend to be growing pretty strongly and they’re very interesting businesses to be involved in. So, we spend a lot of time looking at Vietnam.”
He added that the liquidity and the market cap size in Vietnam is more of a constraint on the larger $399mAsia Dividend fund, which has a 1.5 per cent weighting to the country.
However, in the $1.3m Asia ex Japan fund has an 11.9 per cent weighting, the third largest in the fund.