Global investors inject money into Chinese equity ETFs

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“We are moderately positive on Chinese equities,” said Karim Chedid, head of investment strategy for iShares in Europe, Middle East and Africa.

“We believe that the equity risk premium compensates investors for the risk. In other words, they are inexpensive.

“Chinese stocks are still underrepresented in global indices and management will continue to be bullish. Now might be a good time to allocate for the long haul. “

Jose Garcia-Zarate, associate director of passive strategy research at Morningstar, said the outlook looked attractive to investors.

“The growth picture in China is rebounding much faster than in other economies. It helps explain the interest in equity, ”he said.

Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, agrees, saying that “growth, while slowing, is still a bit stronger than in developed countries.” He believed that the latest inflows were in part from investors trying to buy the downside.

The success of the asset lift of the KraneShares ETF came despite Chinese tech firms suffering a year of regulatory turmoil after the cancellation of Ant Group’s initial $ 37 billion public offering, the company Jack Ma’s Online Fundraising Fund, in November 2020.

KWEB’s share price has fallen 46% so far this year in part because of it, but some believe its major holdings, which include Tencent, Alibaba, JD.com, Baidu and Pinduoduo, remain part. integral to consumer spending in the world’s second-largest economy. .

“You could argue that a third of all retail sales in China go to KWEB companies,” said Brendan Ahern, chief investment officer of KraneShares.

“In equities, investors see that China is becoming an asset class [in its own right]”, he added, pointing out similarities with what happened with Japan in the 1980s and 1990s when it branched off, in the eyes of many investors, from the wider Asia-Pacific region.

Strong demand for Chinese equity ETFs was mirrored by that for the country’s bond ETFs – the $ 12.1 billion iShares China CNY Bond UCITS ETF is the second largest fixed income ETF in Europe two just years after its launch.

The fate of China-focused ETFs contrasts with that of the broader universe of emerging markets.

Data from BlackRock’s iShares arm shows that flows to large global emerging market equity ETFs have collapsed in recent months, with money instead being pumped into regional or single-country funds, led by Chinese funds. and, perhaps more surprisingly, Brazilians.

“Emerging markets are suffering more permanent damage from the downturn in activity and the recession linked to COVID-19. They don’t come back like developed markets, ”Mr. Chedid said.

“As a large complex, it seems more difficult, so ETF investors are going more granular.”

He noted that Brazil “has been underperforming,” with the MSCI Brazil Index down 21.6% year-to-date in dollar terms, so some investors could bet on a bottom.

But Bartolini is not convinced, his data showing net outflows of nearly $ 2 billion from emerging market equity funds this year, except for the $ 13 billion inflow to Chinese funds. .

Instead, he sees signs of strategic allocation to sectors, with $ 77 billion injected into largely cyclical sectors such as finance, energy and real estate this year – a trend now showing signs of. reversal, with defensive sectors such as health care and consumer staples. back in fashion as investors finally begin to integrate expectations of a semblance of monetary tightening in developed countries.

Additional reporting by Emma Boyde

Financial Time


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