‘123128, 10:27 PM [AS China's markets suffer, what alternatives do investors have? = Menu My Economist v Econon Finance and economics | Escaping the dragon As China’s markets suffer, what alternatives do investors have? Optimism about the world’s second-largest stockmarket is a distant memory eee 7 Sa IMAGE: GETTY IMAGES Jan 22nd 2024 | SINGAPORE Share hips. economist com/fnance-and-economics/2024/01/22Ihow-‘e-eplace-china-n-your portfolio 18‘123128, 10:27 PM [AS China's markets suffer, what alternatives do investors have? E veRY Day brings more misery for China's foreign investors. Some are most worried by China’s souring relations with Western governments. Others fret about the unprecedented slump in the country’s property market. Many are simply tired of losing money. On January 22nd the csi 300 index of Chinese shares dropped by 1.6%; it is now nearly a quarter below its level of a year ago. Meanwhile, Hong Kong's Hang Seng index fell by 2.3% on the day, and is more than a third below its level at the start of 2023. Rumours that officials are considering steps to stabilise the market have brought brief respite. But heady optimism about China Inc. is an increasingly distant memory. Just five years ago investors clamoured for exposure to the country's growth miracle and sought diversification from rich-world markets, which often move in lockstep. Providers of the world’s most important stock indices—FTsE and MscI—were making adjustments accordingly. Between 2018 and 2020 Chinese stocks listed onshore, known as A-shares, were added to the benchmark emerging-markets index. ; At their peak in 2020 Chinese firms In need of amiracle Market capitalisation, Jan 6th 2020=100 India Emerging markets excl. China made up over 40% of the index by value. In 2022 foreigners owned $1.2trn-worth of stocks, or 5-10% of the total, in mainland China and Hong Kong. One investment manager describes the challenge of investing in Emerging 80 emerging markets while avoiding markets 60 China as like investing in developed China é markets while avoiding America. So 2020 nH 2 B 4 how will investors do it? And where Source: MSCI IMAGE: THE ECONOMIST will their money flow instead? Some investment firms are eager to hips. economist com/fnance-and-economics/2024/01/22Ihow-‘e-eplace-china-n-your portfolio 206‘123128, 10:27 PM [AS China's markets suffer, what alternatives do investors have? help. Jupiter Asset Management, Putnam Investments and Vontobel all launched actively managed “ex-China” funds in 2023. An emerging-market, ex-China, exchange-traded fund (ETF) issued by BlackRock is now the fifth-largest emerging-market equity ETF, with $8.7bn in assets under management, up from $5.7bn in July. A handful of large emerging stockmarkets are benefiting. Money has poured into India, South Korea and Taiwan, whose shares together make up more than 60% of ex-China emerging-market stocks. These markets received around $16bn in the final three months of 2023. Squint and the countries together look something like China: a fast-growing middle-income country with potential for huge consumption growth (India) and two that are home to advanced Asian industry (Taiwan and South Korea). = ; A ‘Western investors looking for Hefty problem ors fooxang * Market capitalisation by stock exchange exposure to China’s industrial stocks November 2023, $trn are also turning to Japan, encouraged 0 1 2 3 4 5 6 7 _ byits corporate-governance reforms. Shanghai (SSE) Last year foreign investors ploughed Japan (JPX) ' Shenzhen (SZSE) ¥3trn ($20bn) into Japanese equity India (NSE) funds, the most ina decade. For those Hong Kong (HKEX) with broad mandates, different asset South Korea (KRX) classes are an option. Asia-focused Taiwan (TWSE) funds investing in real assets, including infrastructure, have grown anges in popularity. Singapore (SGX) Thailand (SET) Source: World Federation of TAGES THE ECONOMIST Yet these various alternatives have flaws of their own. Unlike China's cheap offerings, Indian stocks are expensive. They have higher price-to-earnings ratios than those in other big emerging markets. Although Japan's stocks look relatively cheap, they make an odd choice for investors seeking rapid income growth. Likewise, Taiwanese and South Korean stocks are included among emerging markets because of the liquidity and accessibility of their exchanges, but both economies are mature high-income ones. hips. economist com/fnance-and-economics/2024/01/22Ihow-‘e-eplace-china-n-your portfolio 316‘123128, 10:27 PM [AS China's markets suffer, what alternatives do investors have? Size is a problem, too. Many of the places benefiting as supply chains move away from China are home to puny public markets. Even after fast growth, India’s total market capitalisation runs to just $4trn—not even a third of Hong Kong, Shanghai and Shenzhen combined. When MscI released its emerging-market index in 1988, Malaysia accounted for a third of its stocks by value. The country now represents less than 2%. Brazil, Chile and Mexico together made up another third; today they make up less than 10%. And whereas returns on Chinese investments tend to follow their own logic, smaller economies are more exposed to the vagaries of the dollar and American. interest rates. According to research by uBs Asset Management, Chinese stocks had a correlation of 0.56 with those in the rich world between December 2008 and July 2023 (a score of one suggests the stocks rise and fall in tandem; zero suggests no correlation). By contrast, stocks from emerging markets excluding China had a correlation of 0.84 with rich-world equities. The emergence and growth of funds that pledge to cut out China will make life easier for investors who wish to avoid the world’s second-largest stockmarket. Without a turnaround in the country’s economic fortunes, or a sustained cooling of tensions between Beijing and Washington, interest in such strategies will grow. They will not, however, evoke the sort of enthusiasm investors once felt about China. & Editor’s note (January 23rd 2024): This article has been updated for market moves. 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