I generally avoid quoting (let alone making) statements like I’m about to make, but an exception is in order in light of recent events: This is why critics warn against including Chinese assets in benchmark indices.
The MSCI Emerging Markets Index has a 37.5% weighting to China, with what, for an index anyway, might fairly be described as concentrated positions in Tencent, Alibaba and Meituan. Obviously, there’s a laundry list of very good arguments for that tilt. It’s not an accident and it’s not the result of negligence. In some respects, it’s unavoidable.
However, during times like these, it looks questionable. Beijing’s sweeping regulatory crackdown spanning everything from mega-tech to food delivery to ride-hailing to online tutoring unleashed a tsunami of selling, inflicting devastating losses on investors in a dizzying hodgepodge of names, some of which were previously considered “must-owns.”
Read more:
Beijing Teaches ‘Mr. Market’ A Lesson. But You Folks Will Never Learn
Although nobody who invests in EM equities should be surprised to learn of their exposure to the vagaries of Party prerogatives, some folks invariably are. Surprised, that is.
This week’s wipeout in Chinese shares helped push EM equities (as proxied by the MSCI gauge) into the red for 2021. The three-session slide (figure below), concurrent with the selloff in Hong Kong, is the worst since the initial pandemic panic last year.
It’s not just China. There are concerns about COVID flareups in Southeast Asia and the prospect of Fed tightening is always cause for consternation in EM. But Beijing’s widening crackdown is the locus of concern.
To the extent you bet on EM as a kind of leveraged play on the global economic recovery, the underperformance in 2021 (figure below) is particularly disappointing.
On Tuesday, Bloomberg’s Robert Brand cited his colleague Cameron Crise in noting that, based on volatility and market cap, Tencent is “one of the world’s six most influential stocks.”
Assuming that’s true (and I don’t see much utility in trying to replicate the math behind that assertion — it’s influential on virtually any metric, so whether you want to rank it sixth or tenth or ninth or thirteenth is largely irrelevant), an ~18% collapse in the space of just three sessions is bad news.
Crise wrote Tuesday that when it comes to China’s ongoing crackdown, “no one, especially foreign owners, [has] an edge.” “Is this a permanent crackdown on all things capitalist?”, he wondered.
That reminds me: When you hear the GOP (both the nominally sane strain and the increasing dominant Area 51 variant) claiming their counterparts across the aisle are “communists” or “anti-capitalist,” you might simply post a chart showing the relative performance of the Nasdaq 100 versus the Hang Seng Tech Index (below) alongside a looped Kanye shrug gif.
And you might also note that when it comes to cracking down on America’s largest and most profitable companies (i.e., mega-cap tech), heavy-handed government intervention has bipartisan support.
Speaking of “party prerogatives.”
It wasn’t long ago that Niall Ferguson was touting the inevitability of “Chimerica” , the symbiotic relationship between the US and China
If one brings up a reasoned argument for the GOP’s Area 51 crowd (I like the analogy), one may as well spend time talking to one’s dog. At least the dog will listen and probably have an equal understanding of the concepts as that crowd. And the response from the dog will be much more appealing — even if the dog is slobbering.
The rank and file of this crowd have a philosophical Achilles heel. It is inequality. The most crazy of the crazy will agree with anyone that the rich aren’t paying their fair share. The benefits are too stacked in favor of the wealthy. Using this argument can win an election for the people. However unfortunately I see little movement by the Democrats to incorporate this as an attack mode.
It will be interesting to see how this face-off between the Party and the capital markets plays out.
I cannot think of many major Chinese stocks whose appeal doesn’t depend on the very characteristics that the Party seems to be trying to suppress. Excess leverage, over production, mass consumer data collection, grinding labor practices, and so on.