Unleash Your Investment Profits: Why The Demand for Asian Investment Products is Skyrocketing (Hint: It’s Not China)

Global fund managers say they are scrambling to meet client demand for new Asian investment products excluding China as investor appetite for the region’s largest economy is hit by slowing growth and rising of geopolitical risk.

Fund managers such requests for “ex-China” products included the possibility of “Asian allied” funds that would invest in markets favorable to the United States and would provide clear insulation from Beijing-related geopolitical risk in the region.

The widespread adoption of such investments would mark one of the biggest structural shifts for Asia-Pacific markets since the advent of “Asia ex-Japan” portfolios nearly three decades ago, according to asset managers. They said demand was fueled by worsening US-China tensions and a rally for the rest of the region which had left behind its biggest market.

“Investors are worried about geopolitics,” said Minyue Liu, an investment specialist at BNP Paribas Asset Management. Liu said international clients have started sending RFPs — requests for proposals — to provide investment funds that would cover the Asia-Pacific region but exclude both China and Japan.

“That means there is a real opportunity, it’s not just investors hypothetically asking for it,” said Liu, who added that BNP Paribas AM was already in talks with clients to supply Asia ex-China investment products. “It clearly shows that there is interest in this type of product.”

Investor concerns about exposure to China emerged after Russia’s full-scale invasion of Ukraine, prompting many to reassess the risk of a Chinese attack on Taiwan. But fund managers said demand for investment products from China had increased become more concrete in recent months thanks to worsening relations between Washington and Beijing and China’s sluggish economic recovery.

The divergence is evident from the performance of the MSCI Emerging Markets Asia Index, which has posted net returns of just 1.3% this year, compared to returns of 8.6% for the MSCI EM Asia ex-China Index. Among the best performers in the region are the markets of South Korea and Taiwan, up about 20% and 30% respectively.

Christopher Lees, senior fund manager at JO Hambro Capital Management, said he has heard of potential client demand for “emerging market products ex-China and Asian allies” as a way to tap into the region’s growth while focusing exposure. in countries with strong ties to the United States.

“On geopolitics, there are a lot of different opinions among clients, but I think anyone who thought the US-China tension would fade now is very aware that it won’t,” Lees said. “At the same time, clients are seeing that they can get a lot of exposure to China through other markets like Australia, Japan and South Korea.”

However, he added, the main driver of the trend towards investment from outside China has been “economic, not geopolitical,” as many emerging-market investors considered China’s weighting in MSCI and FTSE investment benchmarks too large. shifting the balance from markets such as Vietnam, Thailand and Indonesia.

“This would be a clear echo of what we had with Japan 30 years ago,” Lees said. At the time, when the size and volatility of the post-bubble Japanese market skewed Asian portfolios too much, demand for Asian products ex-Japan increased, which have remained the key approach to investing in the region.

“The ex-Japan approach has been well established for at least three decades, and clients with whom we have direct mandates don’t ask us, ‘Can you sell all of our exposure to China?'” said Hugh Young, president of Asia- Pacific. by British asset manager Abrdn. “But there are definitely some big institutional investors out there who have exited China.”

Foreign institutional investors are already taking steps to reduce exposure to China while increasing holdings elsewhere in the region. Data from Goldman Sachs based on client trade flows shows hedge funds’ allocation to Chinese equities fell from 13% in January to 9% at the end of May.

Total net inflows into Chinese equities this year have stabilized at about $26 billion, after an initial jump in January as the country reopened. And the latest data shows that investors trading Chinese debt through Hong Kong’s Bond Connect program offloaded about $31 billion worth of government bonds in the first four months of 2023.

By contrast, data from bank ANZ shows that foreign investors raised nearly $38 billion in emerging Asia excluding China stocks and bonds this year, with net purchases of $22.4 billion in May alone mark the largest monthly inflows since 2011.