mythe same day brings more misery to China foreign investors. Some are more concerned about the situation in China bitter relationships with Western governments. Others worry about the unprecedented decline in the country's economy. real-estate market. Many are simply tired of losing money. On January 22, CSI The 300 index of Chinese stocks fell 1.6%; it is now almost a quarter below its level a year ago. Meanwhile, Hong Kong's Hang Seng Index fell 2.3% on the day and is more than a third below its early 2023 level.
The heady optimism about China Inc. is a fading memory. Just five years ago investors were clamoring for exposure to the country's growth miracle and seeking to diversify from rich world markets that often move at the same pace. Providers of the most important stock indices in the world:FTSE and MSCI—We are making the corresponding adjustments. Between 2018 and 2020, Chinese stocks listed in the country, known as TO-stocks, were added to the emerging markets benchmark index.
At its peak in 2020, Chinese companies accounted for more than 40% of the index by value. In 2022, foreigners owned shares worth $1.2 trillion, or 5% to 10% of the total, in mainland China and Hong Kong. One investment manager describes the challenge of investing in emerging markets while avoiding China as investing in developed markets while avoiding the United States. So how will investors do it? And where will your money flow?
Some investment firms are eager to help. Jupiter Asset Management, Putnam Investments and Vontobel launched actively managed “ex-China” funds in 2023. An emerging markets, ex-China exchange-traded fund (etf) issued by BlackRock is now the fifth largest emerging market stock exchange etfwith $8.7 billion in assets under management, up from $5.7 billion in July.
A handful of large emerging stock markets are benefiting. The money has flowed into India, South Korea and Taiwan, whose stocks together account for more than 60% of emerging market stocks ex-China. These markets received about $16 billion in the last three months of 2023. Squint and the countries together look somewhat like China: a fast-growing middle-income country with potential for huge consumption growth (India) and two that They are home to an advanced Asian industry. (Taiwan and South Korea).
Western investors seeking exposure to China's industrial stocks are also turning to Japan, encouraged by its corporate governance reforms. Last year, foreign investors poured 3 trillion yen ($20 billion) into Japanese stock funds, the most in a decade. For those with broad mandates, different asset classes are an option. Asia-focused funds that invest in real assets, including infrastructure, have gained popularity.
However, these various alternatives have their own flaws. Unlike cheap offerings from China, Indian stocks are expensive. They have higher price-earnings ratios than other large emerging markets. Although Japanese stocks look relatively cheap, they make an odd choice for investors looking for rapid income growth. Likewise, stocks from Taiwan and South Korea are included among emerging markets due to the liquidity and accessibility of their stock markets, but both economies are mature, high-income economies.
Size is also a problem. Many of the places that benefit as supply chains shift away from China host insignificant public markets. Even after rapid growth, India's total market capitalization amounts to just $4 trillion – not even a third of that of Hong Kong, Shanghai and Shenzhen combined. When MSCI When Malaysia published its emerging market index in 1988, Malaysia accounted for a third of its stocks by value. The country now represents less than 2%. Brazil, Chile and Mexico together accounted for another third; today they represent less than 10%.
And while Chinese investment returns tend to follow their own logic, smaller economies are more exposed to the vagaries of the US dollar and interest rates. According to an investigation by USB Asset Management, Chinese stocks had a correlation of 0.56 with those of the rich world between December 2008 and July 2023 (a score of one suggests stocks rise and fall at the same time; zero suggests no correlation). By contrast, stocks in emerging markets, excluding China, had a correlation of 0.84 with stocks in the rich world.
The emergence and growth of funds that promise to eliminate China will make life easier for investors who want to avoid the world's second-largest stock market. Without a change in the country's economic fortunes, or a sustained cooling of tensions between Beijing and Washington, interest in such strategies will grow. However, they will not evoke the kind of enthusiasm that investors once felt about China. ■
