Investors shift from China to other emerging markets
Investors shift from China to other emerging markets
Investors Turning Away from China’s Markets in Favor of Other Emerging Countries
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Investors from around the world are increasingly choosing to bypass China’s markets in favor of other emerging countries. This shift is driven by a combination of geopolitical and growth risks in China, as well as the rapid development of other countries that offer better opportunities. The scale of this change is reflected in the massive jump in the assets of emerging market mutual funds and exchange-traded funds (ETFs) that exclude China.
Reasons behind Investor Aversion to China
Investor aversion towards China has intensified this year due to several factors. Firstly, there has been a faltering post-COVID economic rebound, which has disappointed investors who were hoping for a more robust policy response. Additionally, renewed tensions between China and the United States over trade, technology, and geopolitics have further fueled concerns. This has led to a growing wariness among U.S. and European investors of being exposed to the risks associated with the Asian giant.
Emerging Opportunities in Other Markets
The money being diverted from China is finding its way into other emerging markets that are either benefiting from China’s economic pain or have better growth prospects. For example, countries like Mexico, India, and Vietnam are replacing China in global manufacturing supply chains, offering investors new opportunities. The export dominance of China is ebbing, giving rise to opportunities for other emerging market countries to fill the gap.
According to Malcolm Dorson, a senior portfolio manager at ETF manager Global X, “China’s export dominance is ebbing, creating opportunities for other emerging market countries to fill the gap, including Mexico, India, and Southeast Asian nations.” He believes that the changes needed in global supply chains could drive such capital flows for the next decade.
Latin American markets with favorable growth and valuations, tech-driven tailwinds for companies in South Korea and Taiwan, and the benefits of supply chain changes are all offering investors better prospects than China. This has resulted in a significant shift in foreign buying of emerging market Asia ex-China equities, which amounted to $39 billion over 12 months as of mid-July, surpassing inflows into mainland Chinese equities.
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Changing Fortunes for China-Focused Funds
The declining interest in China’s markets is evident in the shrinking size of China-focused mutual funds. The top 10 China-focused mutual funds tracked by Morningstar have seen a drop of over 40% from their peak in 2021. For example, the well-known UBS China Opportunity Equity Fund had its assets shrink to $4.5 billion by the end of June, a mere fourth of its levels in January 2021.
Fund managers and advisers are struggling to attract investment into China-focused products. Benjamin Low, a senior investment director at advisory firm Cambridge Associates, revealed that in the last six to twelve months, there have been almost no queries for a China-focused mandate. Instead, clients are considering ex-China exposures within Asia, such as Japan, which has seen impressive growth in its Nikkei index.
Reputational and Compliance Concerns
Apart from financial risks, western institutional investors are increasingly worried about mounting reputational risks associated with investments in China. It has become challenging to justify China investments, even to internal compliance departments and management. Canada recently held a parliamentary hearing to examine domestic pensions’ relationship with China, while the Biden administration is working on an executive order to restrict outbound U.S. investments to China.
Wong Kok Hoi, the chief investment officer of APS Asset Management, believes that political pressure from the U.S., Canada, and some European investors is a major driving force behind the exodus from China. He stated, “On the face of it, the U.S. seems to have started an investment war, following a trade war and a tech war.” These political concerns further contribute to investors’ reluctance to engage with China’s markets.
Conclusion
Global investors are increasingly choosing to steer clear of China’s markets and explore opportunities in other emerging countries that offer better prospects. The combination of China’s economic challenges, disappointing policy responses, and geopolitical tensions with the U.S. has created a sense of uncertainty among investors. The changing fortunes of China-focused funds and the rising interest in alternative markets reflect this shift.
It remains to be seen how China’s recent pledge to step up stimulus measures will impact foreign money inflows. However, the reputation and compliance concerns associated with investing in China, along with political pressures from Western countries, are likely to continue influencing investors’ decisions. As emerging market countries continue to gain momentum, the future of China’s dominance in global supply chains remains uncertain.
