Sell Japan, buy China? Why Asia demands cherry-picking from investors

Pinning a narrative to shifts and trends in financial markets is why investment analysts and commentators exist. Traders love a good story, especially one that persuasively explains why certain economic or political developments cause asset prices to move in a particular direction.

In Asia, it is more difficult to construct an overarching narrative because of the sheer size and heterogeneity of the region. Differences in countries’ levels of economic development and financial market maturity have been amplified during the past several years by far-reaching geopolitical realignments.

Japan, the largest advanced economy and the most important ally of the United States in Asia, has a 37.7 per cent weighting in MSCI’s benchmark Asian equity index. China, the biggest developing economy, has a 19.3 per cent weighting while India – the second-largest emerging market, the fastest-growing one and a counterweight to China – accounts for 12.9 per cent of the index.

Last year, the dominant narrative in Asian equity markets was “ABC”, or “anywhere but China”, as demand for investment products that excluded China surged. According to HSBC, China accounted for just 12.5 per cent of foreign institutional investors’ purchases of Asian stocks in 2023. Japan comprised 37.1 per cent, while India accounted for 34.4 per cent.

However, sentiment began to shift earlier this year. In February, China made up 34 per cent of foreign investors’ purchases, compared with 20.6 per cent for Japan and just 2 per cent for India. Moreover, the MSCI China Index, which tracks Chinese stocks listed at home and abroad, rose 28 per cent between February 1 and May 20.