As of Sept 4, 19 emerging market ex-China equity funds have been launched this year, equal to the total for all of 2023. — Bloomberg
SHANGHAI: New emerging-market equity funds that exclude China are sprouting up, already matching their annual launch record set last year as investors seek better returns elsewhere amid an extended slump in the nation’s assets.
As of Sept 4, 19 emerging market ex-China equity funds have been launched this year, equal to the total for all of 2023, according to data compiled by Bloomberg.
BlackRock Inc, the world’s largest asset manager, and Sydney-based First Sentier Investors are among the firms that have marketed such funds this year.
The rising number of funds that shun China reflects the country’s declining heft in the global money pool amid persistent concerns about its policy and geopolitical risks.
Doubts over the investability of Chinese equities have lingered for years as Beijing’s efforts to restore confidence have limited impact and the West steps up oversight of the exposure to Asia’s largest economy.
“The prolonged underperformance of China has been weighing on emerging market funds, while domestic markets like India and also exporters like Taiwan and South Korea are doing well,” said Rajat Agarwal, a strategist at Societe Generale SA.
“The emerging market trade is becoming less and less a basket trade, but becoming more country-specific trade.”
Index provider MSCI Inc has culled more than 50 stocks from the MSCI China Index in each of its last three reviews. Meanwhile, India and Taiwan are jockeying to replace China’s top spot in emerging market equity portfolios.
The countries now command more than 18% weightings each in the MSCI Emerging Market Index, compared to China’s 22.5%.
That’s a big change from October 2020, when it took five markets to match China’s weighting.
If recent trends hold, India – long touted as the “next China” – may catch up with China’s standing in MSCI’s Emerging Market index this year.
Although MSCI Inc introduced its emerging market ex-China index as far back as 2017, the strategy of excluding the country gained prominence in the last three years following Beijing’s severe Covid restrictions and a lackluster economic recovery.
Total assets held in the iShares MSCI Emerging Markets ex-China exchange traded fund have swelled to US$15.84bil from US$164mil at the end of 2020, according to Bloomberg-compiled data.
In comparison, the market value of the iShares MSCI China Exchange Traded Fund decreased by about 35% over the same period.
“The exclusion will further deplete flows into China market” and create more pressure on the authorities to revive the domestic sentiment, said Charu Chanana, a head of foreign exchange strategy at Saxo Markets in Singapore.
Investor sentiment over Chinese stocks has become more fragile in recent weeks.
After showing some signs of life in the spring, a gauge of onshore equities is now less than 3% away from slinking back to its February low.
Over the last few weeks, long-term bulls, such as JPMorgan Chase & Co, UBS Global Wealth Management and Nomura Holdings Inc, downgraded China to raise exposure in other markets, citing factors including disappointment over Beijing’s policy moves.
Their souring outlook was again justified, when data showed the country’s manufacturing activity contracted for a fourth straight month, while new-home prices continued to slide. — Bloomberg
