Investors’ confidence in Chinese assets has been shaken, but the country will remain a factor in investment decision-making in Europe, according to a new report.
Demand for Chinese assets has been high in recent years, as the Asian giant has gradually opened its capital markets to foreign investment. “However, investors have been troubled by a series of events that have rocked asset prices,” notes Fabrizio Zumbo, associate director at Cerulli Associates. The MSCI China index, which recorded a positive 29.7% return in 2020, is down 14.0% year to date.
Assets under management (AUM) in Chinese funds domiciled in Europe – including those with a focus on China, Greater China, and Hong Kong – soared by 76.5% in 2020, ending the year at €104.2 billion (US$117.0 billion). Growth this year has been comparatively modest, with AUM rising to €176 billion in June before retreating to €166 billion by the end of October, according to the latest issue of The Cerulli Edge.
The primary cause of the decline is the regulatory action targeting sectors ranging from technology to private tutoring and, more recently, the risk of a credit default by one of China’s largest property developers, Evergrande. Also, e-commerce company Alibaba has suffered multiple setbacks recently as the Chinese government has reined in the tech giant’s dominance.
Despite the concerns, many investors continue to have faith in their long-term growth thesis playing out, the report says. Net new flows of €38.4 billion have been added to Chinese fund vehicles year to date. Many investors continue to allocate to the region on the grounds of improved diversification and superior risk/reward characteristics.
However, some investors are avoiding China, because of doubts regarding its environmental, social, and governance (ESG) credentials. Managers express concern about sourcing ESG data for Chinese companies. Other investors are concerned about the sustainability of its future growth path considering the current macroeconomic and geopolitical scenario.
“Looking ahead, China will continue to be a major factor in investment decision-making within Europe,” says Zumbo. More than half of the managers in Europe that responded to a Cerulli survey are looking to onboard emerging-markets equity sales expertise in the coming 12 to 24 months.