Global investors are reluctant to sink money into China’s stock market despite a hearty appetite for other emerging markets.
A Goldman Sachs Group Inc. analysis of $1.1 trillion of mutual-fund assets indicates funds currently are “underweight” Chinese stocks by 3.1 percentage points—meaning they allocate that much less cash to Chinese stocks than the country’s weighting in global benchmarks, The Wall Street Journal reported. That is the biggest shortfall against global stock benchmarks in a decade, the investment bank told WSJ.com.
Investors have pumped close to $13 billion into emerging-market stock funds overall in the past six weeks, even as they pulled more than $3.5 billion out of China-focused vehicles, according to fund tracker EPFR Global. “That makes China one of the few outliers in a rush into emerging-market assets this year that has notched record inflows of cash in recent weeks,” the Journal reported.
After surging 60% in the beginning of last year, Chinese stocks plunged as much as 41% from June to August. The index rebounded briefly last fall, then plunged 23% in January. The yuan, meanwhile, logged a 5% loss against the dollar in 2015.
“Many investors say they are disturbed by steps China has taken to tame market volatility, from heavy-handed currency intervention and the buying of shares by state-backed funds, to allowing widespread trading suspensions of shares and blaming ‘malicious’ forces for stock-price falls,” the Journal explained.
Others suspect economic conditions may be worse than official figures depict.
“Our issue has been a quality issue with Chinese companies, which we don’t have with Indian companies, where there is a lot more transparency,” Hugh Young, head of Asia for Aberdeen Asset Management PLC, which manages $403 billion globally, told the Journal.
“We’d love to put more money in China because we see ultimately lots of potential. It’s trying to find some nice businesses that are clean…and where we can trust the figures.”
Emerging-market stocks have been rising this year as expectations that the Federal Reserve will refrain from raising interest rates this year, and better-than-estimated economic data from the U.S., stoke risk appetite, Bloomberg reported.
The optimism for continued central-bank stimulus around the world helped equities post the best first-half performance since 2009 relative to advanced-nation shares after three years of underperformance. A gauge of expected volatility in developing-nation equities fell to the lowest level since July 2015.
“Emerging markets will continue to do well,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who favors Indian shares. “The relative risk profile of emerging versus developed markets has improved due to the Brexit uncertainties and emerging-market growth momentum is clearly improving now.”
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