Choosing China is choosing the future

Wednesday, 18 August 2021

The fact that Index builder MSCI has recently increased China in the Emerging Markets index, means that China accounts for more than 35% of this index. The burning question for many investors is now whether they should start managing Chinese equities themselves, or use an Emerging Markets mutual fund or ETF.
In our ‘Money Talks, Money Walks’ report, which has an investment horizon of 6-12 months, we see that the Asset Allocation Consensus for Emerging Markets is positive and the fund flows to this region are positive as well. However, the performance is worrying. The recent fall in Emerging Markets can, for at least 35%, be linked to the decline in Chinese equities and the impact China has on this region. 
As for the long term, our ‘Expected Returns’ report offers a useful insight. For Emerging Markets, the expected returns in US dollars for the coming 10 years is 7.2%. Looking at a shorter term, the expected return for the coming 5 years is 6.7%, which is a little under the 10 years expectation. Looking at the coming 15 years, the expected return is 7.4%, which is a little higher than the 10 years expectation. For each period we can conclude that these returns are the highest of all equity regions.
Choosing China is choosing the future. The economic expectations are higher for this country than for any other region. The following questions are important before looking at the short list of funds:
1. Do I choose an active fund or an ETF?
2. Do I choose a local (Chinese) manager, or not?

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Maria Thorvardardottir

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Maria Thorvardardottir