bfinance: 'Ex-China’ Emerging Markets, a new Great Wall in equities?
bfinance, the independent global investment consultancy, has published a new report looking at the growth of Global Emerging Markets (GEM) ex-China equity strategies. Research has identified 45 asset managers now running live GEM ex-China portfolios – a significant increase from just three in 2017.
Today, China faces fundamental challenges, including a troubled property sector, high local government debt, a growing unemployment rate, a shrinking labour force and state interventions. At the same time, China represents 30% of the MSCI Emerging Markets index – by far the largest country constituent – and so comprises a substantial part of the asset class.
The emergence and maturation of GEM ex-China strategies provide a good opportunity for investors to reconsider their long-term portfolio strategy. GEM ex-China strategies provide a lever with which to express positive, negative or neutral views on China. These strategies can complement a standalone China equity allocation – allowing for greater specialism – or provide an option for investors who wish to remove, actively manage or structurally reduce their exposure to China.
GEM ex-China equity strategies are proliferating in number, with 45 managers now running GEM ex-China equity portfolios and close to 100 others considering doing so. Investors should exercise caution during manager selection: live track records are short, with only three strategies in existence for more than five years, and managers need appropriately deep research capabilities to build robust portfolios without China.
While quoted fees are broadly similar to active GEM equity, ‘early bird’ and seed investor discounts provide significant opportunities for highly competitive fees. Allocators casting a broad net can identify a large number of managers who are looking to enter the space and/or build assets, creating good scope for negotiating attractive terms.
Robert Doyle, Senior Director at bfinance, said: 'The emergence of credible GEM ex-China strategies provides investors with a new way to approach emerging markets investing, and these strategies are relevant to investors irrespective of their sentiment towards China. We see demand growing among our institutional client base and ‘supply’ is expected to develop quickly, with 45 firms already operating in this space and close to 100 others actively considering a new product launch.'