Global money managers, desperate to avoid exposure to sliding Chinese markets, have fresh investing tools at their disposal as pessimism toward the world’s second-largest economy snowballs.
US financial-products provider Direxion launched a leveraged emerging market-focused exchange-traded fund last week that snubs equity allocations to the Asian nation altogether. It comes as the latest Bank of America Corp. survey shows that going short Chinese stocks — the second-most crowded trade for months now after being long the so-called Magnificent Seven tech companies — is becoming ever-more popular.
On Wall Street and beyond, investor appetite toward the nation is vanishing anew amid a property crisis, deflation, slowing growth and rising youth unemployment. The MSCI China index has slumped nearly 7% this year alone, putting it almost 60% below its 2021 peak.
“Skepticism has been growing over the past three years amidst chaos from different areas and has just been fully exposed by the recent market and economic turmoil,” said Hebe Chen, an emerging-markets analyst at IG Markets Ltd. in Melbourne.
The pessimism has hardened of late with market participants not only shifting their portfolios out of the nation, but also riding vehicles to capitalize on the pessimism.
Direxion’s ETF, Direxion Daily MSCI Emerging Markets ex China Bull 2X Shares (ticker XXCH), began trading Feb. 7. The world’s top-selling EM fund last year was the iShares MSCI Emerging Markets ex China ETF (EMXC), and so far is inching closer $10 billion in assets, according to data compiled by Bloomberg.
A third of the respondents to the BofA survey, with $568 billion in assets combined globally, said they will increase their allocation to Chinese equities if they see more aggressive fiscal policy to boost the real estate sector.
Going Defensive
For now, money managers mandated to invest in Chinese stocks are doing what they can to reduce potential losses.
The China holdings of Barings are “positioned toward defensives and yield-generating assets, both due to their lower volatility and attractive current valuations,” William Fong, head of Hong Kong China equities for the firm, wrote in a client note Wednesday.
“Capital has not been efficiently deployed throughout the economy — a key area for the government agencies to improve in the year ahead,” he said. “We are monitoring the impact of recently launched policies, such as the relaxation of purchase qualifications for properties, as well as new initiatives aimed at stimulating consumption.”
A record $19.8 billion was plowed into funds focused on Chinese stocks in the week through Feb. 7, a splurge likely driven by state-backed investors, BofA said. Yet the MSCI China gauge remains down for the year.
The “great unwind” in China’s portfolio flows is just “starting,” said Davide Oneglia, director at GlobalData TS Lombard. The raft of measures put in place by Beijing has helped, he added, “but structural drivers will continue to dominate the broad financial cycle.”
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