Rise of ex-China funds due to regulatory concerns and economic uncertainty in China

Ex-China fund assets have grown from USD 800 million to USD 25 billion in a decade, reflecting shifting investor sentiment and structural changes. The Morningstar Emerging Markets ex-China Index has outperformed the Morningstar China Index since January 2020. Regulatory concerns and economic uncertainty in China have contributed to this trend.

Emerging-market ex-China funds have surged in popularity due to China’s current challenges, potentially leading to a separate allocation for China in the future. However, completely avoiding China can pose risks by altering sector exposures and reducing access to unique growth opportunities.

China’s attractive valuations compared to other emerging markets present long-term upside for contrarian investors. Combining emerging-market ex-China strategies with a reduced China allocation can offer a balanced approach to mitigate risks and access China’s market potential through skilled active management.

A flexible approach to market timing, including underweighting China when necessary, can be more beneficial than completely avoiding the market. This strategy allows for diversified exposure to emerging markets while retaining the potential for long-term growth and alpha opportunities without a binary choice of inclusion or exclusion.

Read more at Morningstar: The Rise of Ex-China Funds