China Angst Drives Boom in Funds Excluding Asia’s Biggest Market
A strategy of stripping China out of emerging-market portfolios is fast gaining traction as stock managers seek to reduce the risk of investing in a country that faces unique policy and geopolitical headwinds.
Nearly non-existent before 2015, such products sprang up last year as the inevitability of Chinese equities came into question, with 12 launches including from Goldman Sachs Asset Management. Another five came to the market in the first half of 2023, including BlackRock Inc.’s fund, according to data compiled by Bloomberg.
The budding trend underscores a growing belief that the country is too big and complicated to be lumped with others. Its stocks now account for nearly 30% of MSCI Inc.’s emerging market gauge. That’s particularly problematic as China’s equities are on track to underperform global stocks for a third straight year as tensions with the West, private-sector crackdowns, and a slowing economy hamper returns.
“One has to ask what are the potential consequences should China get involved in a conflict with other parts of the world — in that event, what would happen to your investments related to China?” said Victor Zhang, chief investment officer for American Century Investments based in Kansas City, Missouri. “That’s a legitimate question and supports a long, secular trend of thinking of China as a segregated allocation.”
MSCI launched its emerging markets ex-China Index in 2017, but the strategy took off in recent years following China’s draconian Covid restrictions and an underwhelming post-reopening economic boom. Beijing’s reluctance to deploy big stimulus and structural headwinds including a shrinking population are giving investors more reasons to look elsewhere for returns.