INVESTING EXPLAINED: What you need to know about EMXC – emerging markets excluding China
In this series, we debunk the jargon and explain a popular investment term or theme. Here it is EMXC.
EMXC – what’s with these initials?
What can we say? The financial services industry loves abbreviations. EMXC stands for emerging markets ex China.
In recent weeks, funds that support emerging markets – excluding China – have proven very popular. They are believed to offer the prospect of long-term profits, with a slightly lower level of risk.
About a third of the typical emerging markets exchange traded fund (ETF) portfolio will be invested in China. But the world’s second-largest economy faces problems on a number of fronts that observers don’t think can be easily solved.
Outlook: Funds that support emerging markets – excluding China – have proven very popular
Which markets are ’emerging’?
The standard definition is every country in the world except America, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most Western European countries.
EMXC funds appear to be focusing on Asia. For example, Bloomberg reports that $1.6 billion flowed into the $6.7 iShares EMXC ETF, whose largest holdings are in India and Taiwan.
The fund owns the largest South Korean conglomerate Samsung and the Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest semiconductor manufacturer. This group is at the center of tensions with China claiming independent Taiwan as a province. It is not always easy to break away from China.
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 environmental concerns. Others are more deterred by geopolitical circumstances.
US-China relations have deteriorated, with America determined to limit China’s access to advanced technologies, especially those related to AI (artificial intelligence).
The US has introduced export controls that make it difficult for giant American semiconductor groups such as AMD and Nvidia to sell their chips to China. These controls have now been extended to ASML, the Dutch semiconductor equipment manufacturer, following an agreement with the Dutch government.
Any other reasons?
China has made a cautious return to growth post-Covid. Although stocks rose sharply as the country reopened after the pandemic, these gains have all but been lost. This is largely due to the crisis in the real estate sector.
The expansion was based on the belief that real estate prices were guaranteed to continue to rise and was fueled by loans from Chinese banks and international investments.
But over the past three years, Beijing has adopted new policies to rein in the sector. This reversal has exacerbated the predicament of dangerously overburdened developers Country Garden and Evergrande.
What do these emerging market economies offer?
The prospect of growth on a large scale, apparently. Wages in these countries are rising, increasing purchasing power, which accounted for 55 percent of the global total in 2022, a percentage that is expected to rise further.
However, if this sounds exciting, it’s worth checking if you already own some of these emerging markets stocks through technology funds.