As Chinese markets suffer, what alternatives do investors have?

People cross a bridge that shows the latest economic and stock market data in the Liuiazui financial center, in Shanghai (China), on January 16, 2024 (EFE) (ALEX PLAVEVSKI/)

Chinese foreign investors suffer more every day. Some are more concerned about the sour relations of China with Western governments. Others are concerned about the unprecedented drop in the country’s real estate market. Many are simply tired of losing money. On January 22, the CSI 300 index of Chinese stocks fell 1.6%; it is now almost a quarter below its level a year ago. Meanwhile, the index Hong Kong’s Hang Seng fell 2.3% on the day, and is more than a third below its level at the beginning of 2023. Rumors that authorities are considering measures to stabilize the market have provided a brief respite. But optimism about China Inc. It is an increasingly distant 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 in unison. The providers of the world’s most important stock indices – FTSE and MSCI – made adjustments accordingly. Between 2018 and 2020, listed Chinese stocks, known as a-shares, were added to the emerging markets benchmark index.

At its peak in 2020, Chinese companies accounted for more than 40% of the index’s value. In 2022, foreigners owned $1.2 trillion in stocks, that is, between 5% and 10% of the total, in China continental and Hong Kong. An investment manager describes the challenge of investing in emerging markets by avoiding China how to invest in developed markets avoiding USA. How will investors do it? And where will your money flow?

Some investment companies are willing to help. Jupiter Asset Management, Putnam Investments and Vontobel launched actively managed “ex-China” funds in 2023. An emerging markets exchange-traded fund, without Chinaissued by BlackRock It is now the fifth-largest emerging market equity exchange-traded fund, with $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 been poured into the India, South Korea and Taiwanwhose shares together represent more than 60% of emerging market securities excluding China. These markets received around $16 billion in the last three months of 2023. If you look closely, the countries look like China: a rapidly growing middle-income country with potential for huge growth in consumption (India) and two that house advanced Asian industry (Taiwan and South Korea).

Western investors seeking exposure to Chinese industrial stocks are also heading to Japan, encouraged by their corporate governance reforms. Last year, foreign investors poured 3 trillion yen ($20 billion) into Japanese equity 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, are increasingly popular.

However, these alternatives have their own flaws. Unlike China’s cheap offerings, Indian stocks are expensive. Its price/earnings ratio is higher than that of other large emerging markets. Although Japanese stocks look relatively cheap, they are an odd choice for investors looking for rapid income growth. Likewise, the actions of Taiwan and South Korea They 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 from shifting supply chains out of China They house weak public markets. Even after rapid growth, the total capitalization of the Indian market amounts to only $4 trillion, not even a third of Hong Kong, Shanghai and Shenzhen together. When the MSCI published its emerging markets index in 1988, Malaysia represented a third of its values. Now the country represents less than 2%. Brazil, Chili and Mexico together they represented 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 dollar and U.S. interest rates. According to a study by UBS 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 in tandem; zero suggests no correlation). On the other hand, emerging market securities, excluding Chinahad a correlation of 0.84 with those in the rich world.

The emergence and growth of funds that commit to excluding China They will make life easier for investors who want to avoid the world’s second largest stock market. If there is no change in the country’s economic situation, or a sustained cooling of tensions between Beijing and Washington, interest in these strategies will increase. However, they won’t evoke the kind of enthusiasm that investors once felt China.

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