COLUMN-Is China now an ‘alternative’ investment?  McGeever

COLUMN-Is China now an ‘alternative’ investment? McGeever

By Jamie McGeever

ORLANDO, Florida, February 9 (Reuters)An engine of world growth for 20 years, the world’s largest commodity consumer and number two economy has somehow slipped into the “alternative investment” bucket for many global investors.

China’s property meltdown and increasingly interventionist government, along with deepening geopolitical rifts with the United States, have dramatically diminished its allure as a destination for international capital.

China may not yet be “not investable“, as US Commerce Secretary Gina Raimondo suggested, US companies believe, but many investors are recategorizing their reduced exposure – in some cases to alternative investments.

“Alts” are typically active outside of traditional stocks, bonds and money buckets, such as hedge funds, real estate and private equity. They are often riskier but potentially more profitable bets, and are attractive for their diversification and hedging qualities.

Most importantly, they are not linked to traditional assets. That’s what many investors now see in Chinese stocks and bonds – a non-correlative, idiosyncratic play, effectively a hedge against their key bets.

That was the anecdotal evidence gathered from investors, asset managers and allocators on the sidelines of the recent Hedge Fund Week conferences in Miami. It is also supported by trends in global capital flows.

One fund manager said he might put 5-10% of his portfolio in Chinese stocks, but is fully prepared to lose it. A hedge fund manager overseeing billions of dollars in assets said he likes China’s “idiosyncrasies” and diversification qualities, but noted that his investors’ money is mostly offshore, not on land.

Alex Lennard, fund manager at Ruffer, admitted that the economic climate in China is “obviously terrible”, but his firm is putting money there, essentially as a hedge.

“It’s a small part of our portfolio, about 4%, but it provides an offset to some of the other market ‘collateral’ that exists,” Lennard said.

It is worth noting that they are relatively optimistic about China. The broader consensus is much gloomier.

POUR, POUR, POUR

According to Morningstar Direct, US equity funds’ weighted average exposure to Chinese stocks in December last year was 1.38%, down from 2.17% three years ago, while their weighted average equity exposure fell to 3.5% from 4.13 %.

US emerging markets funds’ allocation to China as a share of total EM exposure fell to 20.6% from 28.6% on an asset-weighted basis and to 20% from 26% on an equity-weighted basis.

It’s a similar model for global emerging market funds. China’s share of their overall EM equity allocation has fallen to 19.5% from 27.1% on an asset-weighted basis and to 21% from 25.5% on an equity-weighted basis, according to Morningstar Data.

However, demand for Chinese bonds should be stronger, right?

China is included in the $1.2 trillion JP Morgan EMBI Global Diversified benchmark bond index and now has a built-in demand for Chinese bonds from the yuan’s emergence in recent years as an alternative international reserve currency.

But China’s share of the $12 trillion global FX reserves fell to a four-year low of 2.37%, and has never been higher than 2.83%, according to the International Monetary Fund.

Figures from the Institute of International Finance show outflows from Chinese debt portfolios for seven consecutive months and only three monthly inflows in the past two years.

Meanwhile, ex-China emerging market debt funds have attracted inflows for the past seven months and in January drew $47.3 billion, the most since October 2022 and one of the highest on record.

Any way you slice it, investors of all stripes are taking chips off the Chinese table.

OPTIMISM EXPLODES

This is not how many thought it would turn out.

A Greenwich Associates survey of institutional money managers in 2020 showed that pension and endowment funds had 3-5% allocations to China and only 5% of North American institutions had any dedicated exposure to Chinese stocks.

Nearly a quarter of respondents said they plan to increase or significantly increase their dedicated allocation to Chinese stocks in the next three to five years.

Liang Yin, chief investment officer at Willis Towers Watson, wrote in November of that year that investors should consider increasing their allocation to China to around 20% over the next decade.

But Beijing’s closer alignment with Moscow, the breakdown of relations with Washington and the strengthening of its interventionist hand in business and markets in the country have frightened many horses.

The findings of a last poll From the Official Forum of Monetary and Financial Institutions the 22 public pension and sovereign wealth funds managing $4.3 trillion in assets were surprising – none had a positive outlook on China’s economy or saw higher relative returns there.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Foreigners reduce holdings of Chinese securities https://tmsnrt.rs/498LoWu

China, emerging market flows change https://tmsnrt.rs/42vOAJf

Funds flow from China – Lipper/LSEG https://reut.rs/3HtLEDl

(By Jamie McGeever; Editing by Kylie MacLellan)

(([email protected]; Reuters Message: [email protected]))

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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