As the world continues to grapple with the economic aftermath of the COVID-19 pandemic, a notable shift is taking place in the realm of international investments. Increasingly, global investors are choosing to bypass China, the world's second-largest economy, in favor of emerging markets that are either reaping benefits from the geopolitical and growth risks haunting China or are more insulated from these perils.
This marked change is reshaping the investment landscape, spotlighting countries previously overlooked as viable options for substantial capital inflow. This shift in investment focus has gained momentum this year, following a lackluster economic rebound in China after the pandemic.
Investors are expressing dissatisfaction over the Chinese government's lackluster policy response, as well as renewed tensions between China and the U.S. over trade, tech, and geopolitics.
The Rising Stars in Emerging Markets
Malcolm Dorson, a senior portfolio manager at ETF manager Global X, says, "China’s export dominance is ebbing, creating opportunities for other emerging market countries to fill the gap, including Mexico, India, and Southeast Asian nations." In this changing investment environment, these countries are stepping into the limelight, gaining attention and investment dollars that were once almost exclusively funneled towards China.
Furthermore, Exchange Traded Funds (ETFs) and other funds that offer an alternative to tracking the EM MSCI index, where China comprises nearly a third, are also increasingly being considered as viable options by global investors.
John Lau, portfolio manager for Asia Pacific and emerging market equities at SEI, suggests that "China is the one major country that investors are most concerned about in EM."
Beyond Finances: The Rising Reputational Risks
Beyond the potential for financial losses, western institutional investors are increasingly concerned about reputational risks associated with investments in China.
It's becoming more challenging for portfolio managers to justify China investments even to internal compliance departments and management. Wong Kok Hoi, Chief Investment Officer of APS Asset Management, notes a clear trend in investor behavior, stating, “U.S., Canadian, and some European investors are exiting China due to political pressure.
On the face of it, the U.S. seems to have started an investment war, following a trade war, and a tech war”.
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