Emerging markets ex China are offering investors substantial investment opportunities, helping them diversify portfolios and reduce country concentration risk. Many emerging market portfolios are naturally biased towards China, given the size and depth of the country’s capital market.
Investors are increasingly treating China separately when allocating to emerging market equities because of its unique profile as an investment destination. This strategy gives investors the chance to invest in emerging market equities, and tailor their asset allocation to China accordingly or exclude it completely.
It’s not unusual to remove large individual markets such as China from broad regional equity strategies when they become sizeable. Back in 2001, Japan split from the rest of Asia, when the MSCI launched the Asia ex-Japan index. The move recognised the country’s mature economy and stock market. It acknowledged the changing perceptions of investors that Japan had a different investment profile.
Parallels can be drawn with China today. We can view emerging markets ex China as a nascent version of Asia without Japan.