There is hardly any equity universe that is more dynamic than the emerging markets. It is not for nothing that the term emerging markets is used. In this universe, China has become by far the largest weighting in terms of market capitalization in recent years (around 1/3 - and rising). And not only does the Chinese stock market stand out in comparison to other emerging markets, it also now ranks second globally (after the U.S.). High time, then, to start thinking about future implementation in the portfolio.
Does it make sense to continue to include China as part of the emerging markets, or has the country already outgrown them?
In our opinion, it makes perfect sense to handle China as a separate component and thus gain flexibility in portfolio construction. Depending on the individual point of view, both an overweighting and an underweighting compared to the current composition can make sense.
If we look at market capitalization or economic performance, it quickly becomes clear that China is actually underrepresented in common emerging market indices (e.g. MSCI Emerging Markets Index) despite its already high share. An overweighting of the component offers itself here. Chinese companies are also attractive from a risk-return perspective. The prices of Chinese equities often move relatively independently of developed capital markets and thus improve the diversification of the overall portfolio. In addition, Chinese companies are comparatively favorably valued and offer interesting return potential due to economic growth.
At the same time, there are of course challenges with Chinese equities, such as high price volatility, government interference in individual companies, and low sustainability scores. We address these specific challenges in our OLZ Equity China Optimized ESG fund, launched in September 2021, which reduces risks in line with our investment concept while consistently taking sustainability criteria into account. However, even we cannot solve certain problems. Anyone who wants to underweight or completely exclude China as a country for human rights or geopolitical reasons will have the opportunity to do so with OLZ as of April 27 2022. From then on, our emerging market fund will no longer include any Chinese securities and will subsequently be renamed «OLZ Equity Emerging Market ex China».