In this series, we bust the jargon and explain a popular investing term or theme. Here it’s EMXC.
EMXC – what is it with these initials?
What can we say? The financial services industry loves its abbreviations. EMXC stands for emerging markets ex China. In past weeks, funds that back emerging markets – with the exclusion of China – have proven very popular. They are seen to provide the prospect of long-term gains, with a slightly lower degree of risk.
About a third of portfolio of the typical emerging markets exchange traded fund (ETF) will be invested in China. But the world’s second largest economy is facing problems on a number of fronts that observers do not believe will be easily resolved.
Which markets are ’emerging’?
The standard definition is every country in the world, save America, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most of the Western European nations.
EMXC funds seems to concentrate on Asia. For example, Bloomberg reports that $1.6billion flowed into the $6.7 iShares EMXC ETF whose largest stakes are in India and Taiwan.
Prospects: Funds that back emerging markets – with the exclusion of China – have proven very popular
The fund owns the largest South Korean conglomerate Samsung and the Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest semiconductor maker. This group is at the centre of the tensions which sees China claiming independent Taiwan as its province. Breaking free of China is not always easy.
The Matthews Emerging Markets ex China fund, launched last month, focuses on India, Brazil, Mexico and South Korea.
Why do investors want to avoid China?
Some are deterred by China’s human-rights record and by environmental concerns. Others are more put off by geopolitical conditions. Relations between the US and China have deteriorated, with America determined to restrict China’s access to advanced technologies, particularly those linked to AI (artificial intelligence).
The US has introduced export controls that make it difficult for giant US semiconductor groups such as AMD and Nvidia to sell their chips to China. These controls have now been extended to ASML, the Dutch maker of semiconductor equipment, following an agreement with the Dutch government.
Any other reasons?
China has made a tentative return to growth post-Covid. Although stocks rallied strongly as the country re-opened after the pandemic, these gains have almost been lost. This is largely thanks to the crisis in the property industry.
Its expansion was based on the belief that property prices were guaranteed to keep on rising and fuelled by borrowing from Chinese banks and international investment.
But, in the past three years, Beijing has adopted new policies designed to rein in the sector. This volte face has exacerbated the predicament of the dangerously over-extended developers Country Garden and Evergrande.
What do these emerging market economies offer?
The prospect of growth on vast scale, apparently. Wages are rising in these nations, boosting spending power which accounted for 55 per cent of the global total in 2022, a proportion that is set to increase.
However, if this sounds exciting, it’s worth checking whether you already own some of these emerging market stocks through technology funds.