INF Informa Plc

By Simon Constable 

Exchange-traded funds specializing in emerging markets have been drawing tens of billions of dollars in new investment lately. But not all countries are getting equal love from investors.

Over a period of about 16 months through mid-April, exchange-traded funds specializing in emerging-markets stocks have attracted about $84 billion in cash inflows. However, a cool 80% of that went to stocks of companies in just five countries: China, South Korea, India, Brazil and Taiwan, according to statistics from financial-data provider EPFR, a subsidiary of U.K. events and publishing company Informa PLC. (Some investors view Taiwan and South Korea as developed markets.)

Another takeaway: China's haul amounted to 41% of the total, versus 11% for India, and 0.6% for Russia. ETFs specializing in Chinese stocks include SPDR S&P China (GXC) and iShares MSCI China (MCHI).

In other words, investors aren't throwing money at this part of the market blindly. Some countries are getting a lot more of the action than others.

"Rather than buying broadly diversified funds, investors realize that there will be winners and losers," says Jack Ablin, founding partner, and chief investment officer at Chicago-based wealth-management firm Cresset Capital Management. "They are picking sides."

The proportion of ETF money betting on China during the 16 months in question was far larger than the country's current 31% weighting in the MSCI Emerging Markets Index, a benchmark used across the investing world. The same is true for India, whose 11% share of the inflows compared with the country's MSCI index weighting of only 9.5%.

Mr. Ablin says it makes sense for investors to choose countries like India and China, which both feature large, fast-growing economies. China, the world's second-largest economy, grew at an annualized 6.4% in the latest reported quarter, compared with 3.2% for the U.S. in the first quarter, according to data collated by Tradingeconomics.com. India's recent GDP data, meanwhile, showed annualized growth of 5.8%.

Given the similarity in the growth rates of India and China, it could be seen as surprising that China ETFs took in $34.6 billion, almost four times the $9.2 billion that India-focused ETFs drew. But one big reason for the discrepancy is that China's stock market became attractive again after a period of cooling off caused by investor worries about signs of weakening in China's economy.

The narrative around the Chinese economy "is more compelling of late," says Arthur Hogan, chief market strategist at investment-banking firm National Securities Corp. While the Shanghai Composite Index (China's version of the S&P 500) sold off around 30% during 2018, says Mr. Hogan, that caused Chinese stocks to fall to more attractive prices. That didn't happen in India.

Mr. Hogan notes that the Chinese selloff was caused by slower GDP growth, and worries that threats of tariffs between U.S. and China were suggesting the start of possibly a "long, drawn-out trade war."

Then two things happened. Earlier this year, the trade talks appeared to be going well, and it became clear that the Chinese government would boost the country's economy with a huge economic stimulus.

"The improving narrative around both the U.S.-China trade talks and the Chinese economy has acted like a magnet to emerging market investors," says Mr. Hogan.

Economic overhauls, or the promise of them, also helped make China attractive again to investors, says Kristina Hooper, chief global-markets strategist at New York-based asset management firm Invesco. Ms. Hooper contrasts the Chinese approach with that of Russia, which appears to have done the opposite of wooing foreign money.

Russia, Ms. Hooper says, "doesn't seem to have done anything material to attract investors." The country also faces possible retaliation from the U.S. after Moscow's reported interference in the 2016 presidential election. That may help explain why investors committed a mere $488 million to ETFs focused on Russia, 0.6% of the total, during the recent 16-month period.

The lack of interest in Russia-focused ETFs is less surprising than the indifference investors showed during the period for some other countries.

Ms. Hooper says that Brazil, the largest emerging-markets economy in the Western Hemisphere, would have attracted more ETF investment if it were not for the elections held there last fall. Uncertainty about a new government's economic policies generally causes investors to feel cautious about committing capital.

Brazil's 6% of the inflows to emerging-markets ETFs over the 16 months was lower than its 7.6% MSCI index weighting.

Mexico also seems to have been overlooked by many emerging-markets investors for reasons of uncertainty. Mexico-focused ETFs attracted $2.8 billion, or 3% of the whole. Still, that seems small when the economy of its major trading partner just next door has been so strong.

"Mexico is certainly benefiting from the U.S. economic situation, and that is likely to continue," says Ms. Hooper.

She says one likely reason for the subdued interest was President Trump's desire to replace the North American Free Trade Agreement with a renegotiated deal with better terms for the U.S. The White House worked out a replacement pact, the U.S.-Mexico-Canada Agreement, but that agreement has run into resistance in Congress and has yet to be ratified by Canada or Mexico.

Another country that Ms. Hooper thinks deserves more investment than it is getting: Vietnam.

"Vietnam is a very strong growth story, and they are benefiting from the U.S.-China trade war," she says. "It has very high growth levels, and its economy has benefited from shifts out of China."

The Southeast Asian nation's economy grew 6.8% in the first quarter. It is also seeing outside direct investment into its economy because companies are switching production from China to Vietnam where labor is cheaper.

ETFs focused on Vietnam attracted $587 million over the period, or 0.6% of the total inflows into emerging-markets ETFs.

Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.

(END) Dow Jones Newswires

June 09, 2019 22:17 ET (02:17 GMT)

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