Market narratives are flimsy things, and for recent proof we need look no further than the highly anticipated China reopening trade of 2023. In defiance of the assumed wisdom, reopening has not provided a lasting boost to the global economy, and Chinese equities are not racing ahead. The MSCI China index is actually slightly down in local currency terms for the year to date, and down by nearly 8 per cent in sterling terms, at the time of writing. That’s a pretty stark contrast to the big gains seen in regions such as Europe, Japan and the US as part of a relatively broad market rally this year.
The IC’s Alex Hamer notes that mining stocks could feel the brunt of this Chinese weakness, but it also means another false start for plenty of emerging market and Asian equity funds. More than half of the funds from the relevant Investment Association and Association of Investment Companies sectors (including small-cap and income categories) were in the red for 2023 as of early June – an unsurprising fact given China makes up so much of the underlying market.
Some funds have nevertheless made a strong start to the year, in part because they focus on the region in a less conventional way. Invesco Emerging Markets ex China (GB00BJ04JG36), an actively managed fund that has decent exposures to South Korea, India and Taiwan, is up 10 per cent in sterling terms, while passive non-China options such as the Lyxor MSCI Emerging Markets Ex China UCITS ETF (EMXC) have made some reasonable gains too. Pacific Assets (PAC), an investment trust with a big preference for India and little exposure to China in recent years, has enjoyed a share price total return approaching 7 per cent so far, too.
That offers some hope beyond the traditional emerging market portfolio, and some more esoteric names have also had a decent run. Gulf Investment Fund (GIF), which focuses on shares in companies listed in countries such as Saudi Arabia and Qatar, has made strong gains this year, while BlackRock Frontiers Investment Trust (BRFI) is also on the up. BRFI recently listed Indonesia and Saudi Arabia as its biggest country allocations, although the fund tends to have exposure to various geographies, from Vietnam to Kazakhstan and Thailand. It has also been a good few months for Utilico Emerging Markets (UEM), which focuses on infrastructure, utilities and related sectors, and has had a big exposure to Brazil in recent times. Elsewhere Schroder Asian Total Return (ATR), with a focus on Taiwan and Australia, has fared well.
Plenty of investors will not want to write off China, and the four investment trusts dedicated to investing in the country continue to see their shares trade at a notable discount to portfolio net asset value (NAV), meaning a lower entry point for brave bargain hunters. Those so inclined could pair up a dedicated China fund with an Asia or emerging market fund less focused on that particular country, to avoid overlap. As much as the issue won’t go away, there are plenty of ways to tackle it.
