Investors look to separate China from emerging markets | Asset themes

Investors in the company are looking closely at the potential of their emerging market exposure to stand alone in China, according to various consultants and managers.

While many different factors affect emerging economies, such as the US dollar, exports and commodity prices, China dominates the overall outlook and, according to a recent State Street study, “ something that seems terrible at the moment, especially with President Xi repeating. Their priority is to double to Covid-zero.

“With the creation of energy stuck in the contract area through 2022, this coincides with another EM equity sell-off involving global partners. Beijing has promised to remain active in supporting financial markets, but who knows when We will certainly see that the growth story remains stable in China.”

Rossen Djounov,


With specific reference to the power of China, discussions are beginning to improve in the investment industry, Rossen Djounov, director for Asia at GAM, said. AsiaInvestor.

“China is a big economy and has a lot of investment opportunities, so they think it’s better to come out of the EM basket,” Djounov said.

Jean De Kock, head of research for AMEA and Mercer confirmed that EM ex-China has been the subject of discussions with clients.

“China is a very important market that offers diversification and rich alpha, so one advantage of EM ex-China rules is that it allows investors to better manage China’s share and use alpha access from professional Chinese users.”

Another advantage is that smaller emerging markets can be overlooked within the broader EM order, but managers can focus on these markets as sources of excess over China’s existing EM order, De Kock said. .

Historically, ‘Asian’ stocks have produced large market gains in a similar fashion, said Wilson Chen, managing director for public equities at Cambridge Associates.

Wilson Chen,

Cambridge Associates

“However, these companies generally command price hikes, and the high rise in global interest rates has led to a positive write-down of stocks, causing performance to follow that of Asia and the World Equity Annual Report.”

“Valuations, which have declined from previously extended levels, are now lower in both absolute and relative terms. Therefore, we believe that the client’s portfolio should benefit from the addition of good features, given the reasonable values ​​and security profile of the underlying names. “

Is Your Weight Appropriate?

The question is how appropriate is the weight of China.

Mercer argues that, broadly speaking, China’s onshore equity market is under-represented in global equity indices. For example, the MSCI index of 20% for its ACWI.

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“We believe that an investment in China A-Shares in the range of 5-10% of the investor is fully justified. This should be considered against China ~ 18.5% share of the world GDP in 2021.

For context, the US accounts for ~24% of world GDP (2021) but more than 63% of ACWI.

“But even leaving the idea of ​​economic representation aside, the ratio in China is justified by the portfolio performance benefits of diversification and alpha,” said De Kock.

One way to boost China’s exposure is to boost China’s exposure to large EM stocks through dedicated China A-shares or all-China equity shares. Another thing is to exclude China from EM, in order to limit EM ex-China to all of China.

From a fixed financial position, De Kock sees little reason for disaggregating China’s offshore bonds.

“In the past, our true view was that a large part of the offshore fund’s return was from exposure to the Rmb, and that this exposure was well captured by the equity ratio.

“However, in recent times, we have seen the benefits of allocating to the Chinese government (CGBs) to make a difference in policy with the rest of the world. This may continue for some time, and opportunistic investors may find a place for China’s offshore bonds and their security instruments.”

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In fact, CGB is the only closely related market that achieves positive annual returns in the local financial system. The potential for attractive diversification needs to be reassessed, however, as Western economies are nearing their end-point projections, and are balanced against ESG considerations.

Removing or reducing exposure to China in the portfolio may not be the best response to rising geopolitical risks, De Kock said.

This is in part because it will only provide limited protection across a wide range of adverse conditions, while transferring the portfolio’s performance value across a wide range of favorable conditions.

It may come as a surprise that this method of pushing China out of EM has not yet been developed by the financial community. Few managers have dedicated assets in this space and many managers do not have a financial vehicle available. According to Mercer A global investment management database, no brand managers have a track record in space.

EM cannot leave China

Courtesy of Haymarket Media Limited All rights reserved.


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