MacroscopeBuy stocks in other Asian markets to hedge against risks in China? Not so fast

Rising demand for “Asia ex-China” investment products is not necessarily a sign investors are jumping ship on the world’s second-largest economy

This theme catches on whenever risks in China escalate, but most of the markets viewed as attractive alternatives have their own vulnerabilities

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A public screen displaying stock figures in Pudong’s Lujiazui Financial District n Shanghai on June 21. Photo: Bloomberg

Published: 4:30pm, 22 Jun 2023Updated: 4:31pm, 22 Jun 2023

When Japan’s epic asset bubble burst in the early 1990s, fund managers faced a surge in demand for new investment products for Asian stock markets that excluded the region’s largest developed economy. Even by the end of the decade, Japan still had a weighting of more than 70 per cent in the benchmark MSCI Asia equity index.

In 2001, MSCI launched its Asia ex-Japan index that carved Japan out of the region’s main equity gauge. This provided investors with an index that was not dominated overwhelmingly by a single market, allowing traders to exploit opportunities in other parts of Asia without being exposed to prolonged stagnation in Japan.

More than two decades later, calls for “Asia ex-China” investment products are growing louder. While MSCI introduced an emerging markets index that excludes Chinese stocks in 2017, “the roll-out of an [emerging market] ex-China product suite has been limited since then,” Goldman Sachs noted in a report published in October 2021.

A confluence of factors has given fresh impetus to the Asia ex-China theme in markets. China’s weaker-than-expected recovery from three years of self-imposed isolation has unnerved investors and led to a flurry of downward revisions to growth forecasts. Pessimistic views of China’s economy abound, fuelled by persistent concerns about Beijing’s regulatory clampdowns and the reshaping of global supply chains.

A three-month-long reopening rally petered out in February, leaving the CSI 300 index of Shanghai and Shenzen-listed shares 33 per cent down from its peak in February 2021. The results of Bank of America’s latest global fund manager survey, published on June 13, revealed that an underweight position in Chinese stocks was one of the most popular trades in markets.

By contrast, several other major Asian equity indices have performed strongly this year. Indian stocks have surged to a fresh high, powered by a bright economic outlook and resilient corporate earnings. South Korea’s technology-heavy Kospi index has entered a bull market, buoyed by the recent burst of enthusiasm for artificial intelligence.

According to data from Bank of America, inflows into the equity and debt markets of Asia’s main developing economies excluding China in the first five months of this year reached their highest level since 2019.