How to Avoid China in Your Wallet

So can (and should) you avoid the world’s second largest economy? Some experts think this is exactly what investors should be doing.

“Investors have underestimated autocracy risk,” says Perth Tolle, sponsor of the Freedom 100 emerging markets (FRDM) ETF, a fund that has no exposure to Chinese stocks.

“You can’t always take into account the risk of a government coming overnight and telling a company, ‘You can’t really make a profit,'” she said.

Tolle told CNN Business that investors should be more concerned about the capital flowing out of the country over concerns that Beijing is exerting more control over companies in mainland China.

Therefore, its fund has more exposure to other markets such as Taiwan and South Korea rather than China. Taiwan Semiconductor (TSM) and Samsung (SSNLF) are two top spots in the FRDM ETF.

Emerging market funds outperform without exposure to China

Tolle is not alone in excluding China from emerging markets funds. Major fund companies such as iShares and Columbia Threadneedle also have emerging market ETFs that keep Chinese companies out of their interests.

The funds also outperformed broader emerging market funds this year, showing that investing for social welfare can be profitable.

The FRDM ETF, as well as the iShares MSCI Emerging Markets ex China ETF (EMXC) and Columbia EM Core ex-China ETF (XCEM), have risen between 6% and 8% each in 2021.
That’s compared to a 2% decline for the broader iShares MSCI Emerging Markets ETF (EEM), which owns Tencent, Alibaba and the Chinese delivery service Meituan as top positions.
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Other investment experts argue that recent pressure from Chinese President Xi Jinping to crack down on major tech companies is not a good sign for near-term earnings.

“We like the long-term view, but we’re more cautious in the short term,” said Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management. “Some other emerging markets have better growth potential.”

“The shift from promoting more entrepreneurship to an equal distribution of the growth of the pie changes the equation,” he added. “We took some money off the table and reduced our exposure to China.”

Another portfolio manager argued that trying to predict which companies or sectors will fall under the “Xi Jinping scope of influence” is challenging. Major Chinese education stocks have also taken a hit this year on regulatory concerns.

“Investors’ risk perception has risen in China, and for good reason,” said Paul Espinosa, portfolio manager at Seafarer Capital Partners.

Espinosa also said China is not as attractive as other emerging markets simply because equities outside the country are better bargains.

Companies in Brazil and other parts of Latin America have more compelling values ​​than companies based in China, Espinosa said. He is also looking at investment opportunities in the Middle East.

“Everyone is so focused on China and it’s dominated by growth investors,” he said. “But outside of China there are more options.”

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