The MSCI Emerging Markets slipped 3.6% last year, with a significant portion of the trouble attributable to weakness in Chinese equities. China, the world’s second-largest economy, looms large in an assortment of emerging exchange traded funds.
“2021 was a particularly challenging year for investors in Chinese equity and corporate bond markets,” says Benjamin Lavine of 3D/L Financial Group. “Government/regulatory crackdowns across technology and consumer companies (from monopolistic practices to data sharing to charges of price gouging).”
In a wide-ranging report, Lavine discusses the notion of a “brave China reset.” While that idea could take some time to materialize, if it does, it could have material benefits for assets such as the Emerging Markets Internet Ecommerce ETF (EMQQ ).
As of the end of June, EMQQ allocated 61.9% of its weight to Chinese stocks. That makes sense given the fund’s objective and the fact that China is the largest online retail market among developing economies. That allocation was a headwind amid last year’s regulatory crackdown. Those challenges can abate, but EMQQ investors may need to exercise some patience.
“The regulatory dispute over foreign exchange listing of Chinese companies (particularly U.S. listing) is also an overhang but will likely resolve itself over 2-3 years as exchange listings move to Hong Kong or mainland exchanges,” notes Lavine.
As Lavine notes, the coronavirus pandemic remains a hurdle in the Chinese investment equation. Put simply, the country is employing a zero tolerance policy when it comes to COVID-19. The effectiveness of that policy is up for debate and a separate conversation. However, it’s obvious that China’s handling of the health crisis, whether investors agree with it or not, cannot be ignored.
“Lockdowns across key port cities such as Ningbo also risk gumming up the supply chain as industrial production and export shipments are put on hold. The pandemic continues to wreak havoc on industrial activity as well as travel and leisure even if financial markets are trying to move on,” according to Lavine.
That’s not to say that EMQQ lacks for catalysts. The Winter Olympics, commencing next month, could ignite the China reset that Lavine mentions. Ultimately, caution could favor investors with EMQQ. The right approach might just be monitoring the ETF in the early stages of 2022 and being opportunistic when it comes to initiating new positions or adding to existing ones.
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