Investors around the world are shifting their focus to emerging market funds that exclude China, despite the recent surge in Chinese stock markets. The escalating tensions between Beijing and the west have fueled concerns, leading to one of the most significant changes in emerging markets investing in decades.
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Growing Trend of Excluding China:
Investment firms have witnessed a notable uptick in clients preferring "ex-China" emerging markets funds, perceiving the giant economy as either too sizeable or too risky to be part of their investment portfolios. This shift has propelled the emergence of a new asset class, with funds excluding China experiencing a substantial increase in assets this year.- Franklin Templeton’s recent launch of an "ex-China" emerging markets vehicle is just one of the many examples showcasing this trend.
- The number of so-called "ex-China" equity funds globally has nearly doubled in the past two years, reflecting the investor sentiment towards reducing exposure to Chinese stocks.
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Reasons Behind the Shift:
China, as the world’s largest emerging market, holds significant weight in benchmark indices, with its companies representing a quarter of developing-economy stocks. However, investors are increasingly concerned that excessive exposure to China might overshadow opportunities in more promising economies like India and Taiwan. Moreover, the ongoing geopolitical tensions between China and the west add another layer of risk to investments in Chinese stocks. -
Concerns and Considerations:
Despite China’s recent market rally driven by stimulus measures, many investors remain cautious due to the intrinsic idiosyncrasies and risks associated with the Chinese market. The fear of potential sanctions against Chinese companies and the geopolitical backdrop contribute to the apprehension about investing in Chinese stocks. - Geopolitical Impact:
Political reasons play a significant role in investors opting for "ex-China" funds, particularly among US investors concerned about national security risks. The example of large pension funds in the US divesting from Chinese holdings due to geopolitical uncertainties is a testament to this sentiment. European investors, on the other hand, demonstrate a more pragmatic approach towards managing their exposure to China.
While the move towards excluding Chinese stocks from emerging market portfolios aims to mitigate political risks, some investors question its effectiveness. The "autocracy risk" associated with investments goes beyond geographical borders, raising concerns about exposure to Chinese markets through companies from other developed economies.
In this evolving landscape of emerging markets investing, the decision to go "ex-China" reflects a broader trend towards diversification, risk management, and navigating geopolitical complexities. As investors navigate these turbulent waters, the future of emerging market funds lies in striking a delicate balance between growth opportunities and political prudence.
