The widening economic gulf between China and other emerging markets is prompting some of the world's largest investors to change how they allocate money to the asset class.
Amundi Asset Management, which oversees nearly $2 trillion, and Robeco, a manager of $190 billion, are both rolling out new strategies focused on China amid a surge in demand from clients who had previously invested in the country through global developing-nation funds. BNY Mellon Investment Management favors targeted bets on the Chinese economy, while BlackRock calls the country "an investment destination separate from emerging markets."
China has long stood out in the developing world for its unique combination of size, growth and market depth. But for many investors, the differences weren't extreme enough to separate the country from a broader emerging-market portfolio. That's now changing as China's rapid recovery from the COVID-19 pandemic — and increasingly domestic-driven growth model — make the divide too big to ignore.
Asia's largest economy will probably expand 8.2% in 2021 after outpacing emerging peers by the most since 2009 this year, according to the International Monetary Fund. The country's benchmark stock index has trounced most rivals in 2020 with a 21% advance, while the yuan's 6.4% gain against the dollar is among the best in the developing world. International investors have poured record amounts of money into Chinese bonds, and they've added $10.4 billion to Greater China equity funds tracked by Morningstar this year through October. That bucked a $23.9 billion outflow from developing-nation funds, the biggest outperformance since at least 2007.
"China is clearly a different beast," Yerlan Syzdykov, Amundi's London-based head of emerging markets, said in an interview.
China skeptics note that the country's short-term growth advantage will probably dwindle as the roll-out of COVID-19 vaccines buoys countries in Latin America and Europe hit hardest by the pandemic. There's also the ever-present risk of a debt crisis, underscored by a spate of defaults among state-owned Chinese companies that sent shockwaves through credit markets last month.
Yet bulls see several structural trends that will likely make China a distinct component of portfolios over the long term. One is the country's steady removal of barriers to foreign investment, reforms that have earned its domestic stocks and bonds entry into global benchmark indexes. Another is the economy's continued diversification away from low value-add manufacturing and infrastructure spending toward cutting-edge technology, services and domestic consumption.
"China has a very large and very diversified economy unlike any other emerging market — very similar to what the American economy presents in terms of opportunities," Mr. Syzdykov said.
Fabiana Fedeli, the global head of fundamental equities at Robeco in Rotterdam, said more clients have been separating their emerging-market and China strategies, a trend she expects to continue. As part of its effort to cater to that demand, Robeco started a new Asian equity fund in March. China accounts for almost half of the fund's weighting, versus about 35% for the firm's global emerging-market funds.
In the current environment, it makes more sense for active investors to allocate money to country- and region-specific funds rather than a global one, according to Lale Akoner, a senior market strategist at BNY Mellon Investment Management in London, which has $2 trillion under management. That means a focus on China, but also other select areas within emerging markets that benefit from the country's economic recovery.
"We are much more optimistic on Asia in general," she said. "And within Asia, there are countries that we are much more optimistic about; on top of China, those countries that have solid ties to the resilient sectors of the mainland Chinese economy, such as South Korea, Taiwan and Vietnam."
BlackRock, the world's largest money manager, expects inflows to Asian assets to persist as investors seek more exposure to the Chinese economy.
"We see China as a distinct pole of global growth," Mike Pyle, the global chief investment strategist at BlackRock Investment Institute in New York, wrote with colleagues in a 2021 global outlook report. "There is a clear case for greater portfolio allocations to China-exposed assets for returns and diversification."