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Investors are rushing into emerging market funds that exclude China, despite a recent breakout rally in Chinese stocks amid concerns about escalating tensions between China and the West.
Investment firms told the Financial Times that clients now view the world’s second-largest economy as too big or too risky to manage alongside other developing countries such as India. This is leading to one of the biggest changes in emerging market investing in decades.
Franklin Templeton on Tuesday became the latest manager to launch a so-called “ex-China” emerging markets vehicle, joining a class that has grown assets 75% this year to more than $26 billion, according to Morningstar data. has joined the fund.
“If investors want to avoid certain sectors or regions, the industry is happy to oblige,” said Michael Field, European equity strategist at Morningstar. “This is certainly true for funds that have excluded China from their composition.”
China is classified as the world’s largest emerging market, with Chinese companies accounting for a quarter of the MSCI index, a benchmark for emerging market stocks.
This weight is down from more than 40% at its peak during the global pandemic. However, many investors still view the size as too large, worrying that it drowns out exposure to more promising economies and carries risks over tensions between China and the West. .
This is leading to an “essentially new asset class” as investors build portfolios that can allocate to Chinese stocks individually and increase exposure to India, Taiwan and other markets, Polar Capital said. Portfolio Manager Naomi Weistel said. I have a former China fund.
The surge in Chinese stocks since the government announced its economic stimulus package last month hasn’t changed that calculation, Weistel said, leaving the country’s stocks volatile and betting on the scale of the government’s actions. added. “China is a different type of market. It has these unique risks that probably require expert consideration.”
So-called “out of China” equity funds have seen net inflows of $10 billion so far this year, more than the total amount of money that has flowed into broader emerging market equity funds, according to JPMorgan. The number of such funds worldwide has nearly doubled to 70 in the past two years, according to Morningstar data.
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Fund managers said some investors were concerned about the possibility of further sanctions against Chinese companies, in part because of memories of the collapse in investment in Russia after Russia’s invasion of Ukraine.
European countries are cracking down on Chinese companies accused of helping Russia’s war effort, and the United States has proposed restricting investment in some Chinese high-tech sectors.
BlackRock CEO Larry Fink told a conference in Berlin this month that China is Russia’s “biggest supporter” and “we need to at least discuss that.” .
Fund managers say the political reasons for moving away from China remain focused on U.S. investors, with major pension funds reducing their exposure to the country due to national security risks.
Last year, trustees of the Missouri State Employees Retirement System voted in favor of selling Chinese stocks. “Investing in China carries a level of risk that is against the interests of retirees,” said state treasurer Vivek Malek.
Earlier this year, Florida Governor Ron DeSantis ordered the state’s investment commission to sell existing direct Chinese holdings “to ensure that foreign adversaries like China do not have a foothold in our state.” Signed into law mandating it.
“Overall, U.S. investors have a more negative view of China, while European investors have a more negative view of China,” said Thomas Schaffner, who manages emerging market equity funds at Swiss asset management firm Vontobel. “It’s a more realistic, middle-of-the-road position.”
Some investors question whether simply shifting their emerging market investments to an “ex-China” basis will reduce political risk.
Yves Xueifati, founder of TOBAM, a management company that aims to eliminate “dictatorship risk” in investments, said this risk also exists in stocks of companies in developed countries, with their largest market in China.
“Russia and China are qualitatively the same, but quantitatively the exposure to China is simply huge,” Shueifati added.
Additional reporting by Brooke Masters in New York
