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  • October 23, 2012

    Mark Edwards Mark Edwards, a member of the advisory committee of the T. Rowe Price Emerging Markets Stock Fund

    Global stocks performed well in 2012, but the global economy remains uncertain. Investors are especially focused on China, where there is emerging evidence of economic weakness. In a recent interview, Mark Edwards, a member of the advisory committee of the T. Rowe Price Emerging Markets Stock Fund, discussed China's economic developments and what they might mean for investors.

    Lagging Returns, Slowing Growth

    Asian stock markets outperformed other regions during the first nine months of 2012, surging 15% on average. Chinese equities participated in this rally, but they lagged well behind other regional markets, gaining about 9% during the period. The Shanghai Composite Index did significantly worse than China as a whole.

    This relative weakness appears to be a response to policy initiatives designed to moderate growth trends and rein in inflation. China enjoyed robust gross domestic product (GDP) growth of around 18% in recent years, a pace that put enormous strain on natural resources availability and caused substantial pollution. But it can be difficult to slow growth without triggering an abrupt deceleration, and investors are closely monitoring any information that suggests a recession could be coming.

    Opportunity Outside China

    Beyond the headlines, however, Edwards thinks that Asian markets provide good opportunities for investors. He notes that while inflationary pressures have risen in the region, most nations have managed the challenge with good policy choices. Only India appears to still be coping with substantial inflation.

    On the flip side, says Edwards, the region has many strengths, including strong lending institutions; very high savings rates; and diligent, ambitious workforces. As a result, the underlying conditions for growth are still very strong. He said that the performance of Asian equities now lies in the hands of companies and governments who need to provide strong profit growth and policies that contribute to continued economic expansion.

    Earnings Prospects

    Despite recent gains and a positive market backdrop, Asian companies still have many challenges to grapple with, says Edwards. Corporate earnings in the region have decelerated in recent quarters, as slowing sales, high costs from inflation, and wage increases have detracted from profit margins.

    However, Edwards thinks that revenue growth could be strong in 2013, staying in the high single digits (or higher for companies that can charge premium prices for certain products). Continued corporate success, along with some easing in the prices of oil, coal, and other raw materials, could contribute to strong profitability in the coming year.

    Asian markets will likely remain heavily impacted by events in China. But in Edwards' view, investors that can look beyond China's macroeconomic developments are likely to find some attractive opportunities—in China and the rest of the region.

    Because of the fund's concentration in rapidly developing economies, it involves a high degree of risk. Share prices are subject to market risk, as well as risks associated with unfavorable currency exchange rates and political or economic uncertainty abroad.

    These views are as of October 4, 2012 and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

    Copyright 2014, T. Rowe Price Investment Services, Inc., Distributor. All rights reserved.