HONG KONG, July 27 (Reuters) – Global investors are choosing to sidestep China’s markets in favor of other emerging countries that are either benefiting from or losing out on geopolitical and growth risks looming over the world’s second-largest economy. are far away.
A Reuters analysis shows a jump in assets of emerging market (EM) mutual funds and exchange-traded funds (ETFs) that do not include China as US and European investors seek exposure to the Asian giants. have become more careful.
Investors’ aversion to China has increased this year following a faltering post-corona economic recovery, frustration over the lack of a strong policy response, and a resurgence of Sino-US tensions over trade, technology and geopolitics.
Some of the money is being sent to markets directly benefiting from China’s economic pain, such as Mexico, India, Vietnam and other places that are replacing it in global manufacturing supply chains. Other investors are turning to markets with better growth prospects, such as Brazil.
“China’s export dominance is waning, creating opportunities for other emerging market countries including Mexico, India and Southeast Asian countries to fill the gap,” said Malcolm Dorson, New York-based senior portfolio manager at ETF manager Global X. “
The scale of change needed in global supply chains could increase such capital flows for the next decade, he added.
China-focused mutual funds suffered net outflows of $674 million in the second quarter of this year, while in contrast, nearly $1 billion moved into EM ex-China mutual funds, Refinitiv data shows.
The iShares MSCI Emerging Markets X-China ETF, the world’s largest emerging markets X-China ETF with the largest holdings in companies in Taiwan, South Korea and India, posted a record 1.1% gain in the first half of 2023, the data showed. Attracted net inflows of billion dollars.
With China accounting for nearly a third of the EM MSCI index, such ETFs and funds offer the option of tracking that index as well.
“China is the key country that investors are most concerned about in EM,” said John Lau, portfolio manager for Asia Pacific and emerging market equities at SEI.
Favorable growth and valuations in Latin American markets, tech-driven tailwinds for companies in South Korea and Taiwan, and supply chain changes are providing investors with better opportunities than in China, he said.
Data from Goldman Sachs showed that as of mid-July, foreign purchases of emerging market Asia ex-China equities reached $39 billion in the 12 months, the first time since 2017 that purchases by mainland Chinese through the Stock Connect scheme Equity exceeded inflows.
no buyer for china
The size of the top 10 China-focused mutual funds tracked by Morningstar has fallen more than 40% in 2021 from its peak.
Assets of the well-known UBS China Opportunities Equity Fund declined to $4.5 billion at the end of June, a quarter of January 2021 levels.
Singapore Sovereign Wealth Fund GIC [RIC:RIC:GIC.UL] CIO Jeffrey Jansubhakij said it has “progressively” shifted its capital to regions and countries that are benefiting from changes in the global supply chain and that much of it is “originally out of China into Mexico, India, Indonesia and Has been to countries like Vietnam.”
Fund managers and advisors are scrambling to attract investment in China-focused products.
“Over the past six to 12 months, there has been almost no question of a China-centric mandate,” said Benjamin Lo, senior investment director at Cambridge Associates, a Boston-based advisory firm.
He added that some of his clients are looking at ex-China exposure within Asia such as Japan.
China’s CSI 300 Index (.CSI300) is flat for the year, while Japan’s Nikkei Index (.N225) is up 25% and the S&P 500 (.SPX) is up nearly 19%.
Investors who had been shy since the Donald Trump administration barred US investment in Chinese military companies became more wary after President Joe Biden’s administration expanded the banned list to include areas such as chips and quantum computing. Got worried.
While many of these restrictions apply to exports and venture capital, portfolio investors are wary of running out of investment limits or getting caught in sanctions.
“The situation is worse than last year when investors still had something to do (i.e. reopen),” said a business development manager at a Hong Kong-based hedge fund who was not authorized to speak to the media.
He said the fund managed to generate profits in the first half of the year in a challenging market, and yet has struggled to raise fresh money from foreign investors over the past few months.
China this week pledged to step up stimulus measures to prop up the economy, which offers some hope for investors, but it is too early to say what impact this could have on foreign money flows.
reputation and compliance
In addition to financial risks, Western institutional investors are concerned about growing reputational risks. Portfolio managers say it is becoming increasingly difficult for internal compliance departments and management to justify investing in China.
For example, Canada held a parliamentary hearing in May to examine several domestic pensions regarding its relationship with China. The Biden administration is also working on an executive order to restrict outbound US investment in China.
“US, Canadian and some European investors are pulling out of China due to political pressure. Prima facie, it looks like the US has started an investment war after a trade war and a tech war,” said Wong Kok Hoi, chief investment officer at APS Asset Management.
Reporting by Samar Jane and Patturaja Murugabupathy Editing by Vidya Ranganathan and Sri Navaratnam
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