Need to Know: ‘Emerging markets have a China problem.’ This strategist favors India, which just hit a record.

Speaking from the sidelines of a Jefferies venture-capital conference in Tel Aviv, Orton shares a negative outlook on China, citing the weakness in activity since the economy re-opened, the real estate debt issues, the regulatory environment as well as its market concentration issues.

The U.S., by contrast, has been one of the best-performing markets this year, and a soft landing now looks more likely than it did at the beginning of the year. “Because so many people were under-invested in the U.S., you can get that almost chasing as you go into the end of the year, because a lot of managers are underperforming.”

Orton however is enthusiastic about emerging markets outside of China, and in particular India. India’s Sensex
IN:1
on Thursday closed at a record high, its first since July 20.

“India is a direct beneficiary of what China has lost during zero-COVID. As supply chains continue to diversify away from China, you’ve seen a lot of companies embrace India. You’ve got an economy that has held up well, you’ve got a massive opportunity for infrastructure investment, along with a prime minister and government that seems very pro-business, and willing to insure that a lot of the investments that are put into infrastructure don’t turn into the boondoggles the way they have been in the past.”

He says that’s reflected in earnings per share expansion as well as market breadth. “That’s a lot more exciting than worrying about the overhang risks that you have in a place like China,” says Orton. For India to be an alternative, it will need the same massive and effective infrastructure investment that took place in China 10 to 20 years ago. But separate from infrastructure, there’s a burgeoning consumer class as well, creating opportunities for example in automobile manufacturing.

Orton was asked about the situation at the Adani Group companies, where there have been allegations, denied by the company, that stock of different subsidiaries were manipulated against local market rules. “I think the market has almost forgotten about it,” said Orton. “Time will tell as we see more, but those who invested towards the bottom and said there’s a large opportunity, have been rewarded.”

Other emerging markets he likes include Taiwan and South Korea, and he sees big opportunities in countries like Vietnam, the Phillipines and Indonesia, as supply chain reshoring candidates outside of China. “Where investors are willing to do a little bit of homework, there’s definitely opportunities in Asia ex China.”

Orton returned to the U.S. market, and wonders about the lack of market breadth. “You have companies that continue to beat and raise estimates, but they can’t break out,” he said. “In August, when there was a risk-off environment, I would have thought that the higher-quality names would outperform.”

The clients he has spoken with are reluctant to put new money to work given they can get returns of over 5% in money-market funds. He says he tells them that rates are going to come down, as he likes growth-at-a-reasonable-price type companies.

The executives he spoke with at the conference in Israel, he added, were optimistic. “I think they all understand that 2021 was not a normal environment, and that right now, we’ve probably returned back to what normal should be, focused on profitability or a path to profitability. Everyone here is willing to put money to the work, but in the right opportunities, which I think gives me more confidence as well, that quality is going to matter more in the public markets as well going forward.”

The markets

U.S. stock futures
ES00,
+0.37%

NQ00,
+0.39%
rose following Wednesday’s mixed finish when core CPI came in a touch hotter than forecast. Gold futures
GC00,
-0.20%
fell while oil futures
CL00,
+1.64%
rose.

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The buzz

The European Central Bank is set to make an interest-rate decision, with most analysts now anticipating a quarter-point rate increase. The press conference with ECB President Christine Lagarde will be scrutinized for any clues on rate direction for the rest of the year.

The U.S. economic calendar includes retail sales, weekly jobless claims and the producer price index, the latter a key input for the Fed’s preferred inflation measure, the PCE price index.

ARM Holdings
ARM,
,
the chip designer mostly held by Japan’s Softbank, is due to start trading after pricing its initial public offering at $51.

Berkshire Hathaway
BRK.B,
+0.01%
sold 5.5 million shares in HP
HPQ,
-2.11%,
its first sale since accumulating a 12% stake last year. HP shares are down 2% in premarket trading.

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