(Bloomberg) — China’s share of a key emerging market stock index fell to a record low, highlighting how far the world’s second-largest economy’s bearish outlook is out of step with the rest of the asset class it once dominated.
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China’s stock market accounted for 23.77% of the MSCI Emerging Markets Index as of December 31, according to Bloomberg calculations, while Goldman Sachs Group Inc. The latest weight is at 26.4%, citing FactSet data. Either way, this is the lowest since 2017, when the New York-based company announced the addition of mainland Chinese stocks, or so-called A shares, to the index. The current weight is about 16 percentage points lower than the country’s peak weight in 2020.
Cesar B said: “China’s influence on emerging markets has declined on several fronts,” said Massery, head of emerging markets multi-asset strategy research at Goldman Sachs in New York. “Most obvious is the decline in representation within the MSCI Emerging Markets index, but just as importantly, China’s indirect economic influences on other emerging markets also appear to be diminishing. Accordingly, we find that investors are more willing to express their views within the market pool.” Emerging without the need for a fundamentally bullish view of China.
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Global investors are reducing their exposure to Chinese stocks as the economy struggles to recover from the pandemic recession, regulatory fluctuations increase the risks of investing in the country, and domestic confidence remains weak after the debt crisis hit the real estate sector. The country’s stocks have erased nearly $4 trillion of their value since 2021, ranking among the world’s worst performers last year in a trend that will continue until the beginning of 2024.
“China’s low weight in benchmark indices for emerging markets is a reflection of weak market performance, lower investor positions and large capital outflows,” said Nenad Dinjic, equity strategist at Julius Baer Bank in Zurich. “Continuing weak economic data and regulatory crackdowns over the holidays cast a cloud on the outlook for Chinese stocks.”
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Unexpected decline
China’s decades-long drive to integrate with global markets bore fruit in 2017, when MSCI said it would add mainland stocks to an index that already includes Chinese stocks listed in Hong Kong. The listing began on June 1, 2018 and was implemented in several stages. At the time, Sebastian Lieblich, global head of index research at MSCI, said China’s weight in the emerging market gauge was expected to eventually reach 42%.
The nation appears to be on track to achieve this milestone as asset distributors have begun pumping billions of dollars to rebalance their portfolios and gain more exposure to China. Citigroup Inc. forecast annual inflows of $48 billion into A-shares, while MSCI said the initial listing itself could direct about $17 billion from passive funds, rising to $35 billion in subsequent years.
The rally that followed the MSCI listing helped add $8 trillion to Chinese stocks between 2018 and 2021. The country became so dominant in emerging markets that money managers complained about the lack of interest and capital remaining for other developing countries.
But the Covid pandemic disrupted the rally and subsequent developments caught many China bulls by surprise. President Xi Jinping’s Shared Prosperity Program has raised regulatory risks for Western companies operating in the country, while the country’s extremely strict Covid Zero policy, geopolitical standoffs with the US, and a real estate crisis that has already sparked several bankruptcies have contributed to a shift in market sentiment. .
These factors have pushed the Chinese index’s weighting to an all-time low in the period since the listing of A-shares. The weighting was lower before the listing of mainland stocks.
Extended weakness
By December 2023, China has become the least popular stock market in Asia, Bank of America Corp said. So far, this year has been no better: the Hang Seng Index of Chinese companies is already down 5%, the second worst performance in the world after Lebanon. The A-share index, the Shanghai-Shenzhen CSI 300 Index, fell 4.2%.
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China’s loss in index weights is offset by gains in other major emerging markets. India increased its share to a record 16.7% in the MSCI index, more than double its weight of 7.7% in March 2020. Taiwan 16%, South Korea 12.9%, Brazil 5.8% and Saudi Arabia. By 4.2%, all of them increased their weight last month.
Any rebound is likely to be tactical, with little to stop the long-term decline, according to Julius Baer’s Denek.
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“Valuations and investor positions in Chinese stocks are close to historic lows, indicating that the market bottom may be near,” he added. “However, we believe that tactical rebounds will be short-lived.”
(Updating the second paragraph with Goldman Sachs data, and adding the quote in a new third paragraph)
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