How to avoid the world’s second largest economy in your wallet


Andy Wong / AP

Andy Wong / AP

By Paul R. La Monica, CNN Business

The Chinese economy presents unique challenges for investors. On the one hand, China is home to several of the most dynamic and fast-growing companies on the planet, such as electric car makers Xpeng and Nio as well as the private owner of TikTok ByteDance.

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

“Investors have underestimated the risk of autocracy,” said Perth Tolle, sponsor of the Freedom 100 Emerging Markets ETF, a fund that has no exposure to Chinese equities.

“You can’t always factor in the risk of a government coming in overnight and telling a business ‘you can’t really make a profit,’ she said.

Tolle told CNN Business that investors should be more concerned about capital flows out of the country amid fears that Beijing will exercise more control over companies in mainland China.

This is why his fund is more exposed to other markets such as Taiwan and South Korea than to China. Taiwan Semiconductor and Samsung are the two main holdings of the FRDM ETF.

Emerging market funds fare better without exposure to China

Tolle is not alone in excluding China from emerging market funds. Large fund companies such as iShares and Columbia Threadneedle also have emerging market ETFs that exclude Chinese companies from their holdings.

Funds have also outperformed funds in broader emerging markets this year, showing that investing for social good can pay off.

The FRDM ETF, along with the iShares MSCI Emerging Markets ex China ETF and the ex-China Columbia EM Core ETF, are each up 6% to 8% in 2021.

That is compared to a 2% drop for the larger iShares MSCI Emerging Markets ETF, which holds Tencent, Alibaba and Chinese food delivery service Meituan as its main holdings.

“We like the long term view, but in the short term we are more cautious,” 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 equally sharing the growth of the pie changes the equation,” he added. “We have taken money off the table and reduced our exposure to China.”

Another portfolio manager argued that trying to predict which companies or sectors will fall within “Xi Jinping’s sphere of influence of thought” makes investing there a challenge. Major Chinese education stocks have also been hit this year due to regulatory concerns.

“Investor perception of risk has increased in China, and it has increased for good reasons,” said Paul Espinosa, portfolio manager at Seafarer Capital Partners.

Espinosa also said that China is not as attractive as other emerging markets simply because stocks outside the country are better deals.

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

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

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