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China's 'national team' drives emerging market ETF flows to new record

by SuperiorInvest

A wave of domestic buying by China's “national team” of large state-affiliated institutions helped drive overall net inflows into emerging market stock exchange trading funds to record levels in January.

Emerging markets stock ETFs raised $23.3 billion in January, according to data from BlackRock, surpassing the previous record of $22.8 billion in January 2022. However, 99 percent of this money was pumped into ETFs listed in the Asia-Pacific region, unlike a more normal month like December, when 30 percent of emerging market stock purchases were made through US-listed ETFs.

The buying wall has Beijing's fingerprints all over it, as Central Huijin, an investment arm of China's sovereign wealth fund, joined a host of state-owned insurance companies and asset managers to buy ETFs in an effort to shore up the country's weakened stock market after the benchmark CSI 300 index fell 45 percent from its 2021 high.

EPFR, a data tracking firm, reported on Friday that flows into emerging market stock funds hit a weekly record in dollar terms in early February, also hitting the highest level as a percentage of assets under management since the global financial crisis. 2008. in a measure that had “obvious Chinese characteristics.”

With $19 billion absorbed by Chinese stock funds (including mutual funds) alone, EPFR said: “The latest flows into China-mandated funds have predominantly gone to ETFs domiciled in the country, as Chinese policymakers move to put a floor in a stock market that has lost more than $6 trillion in value in the last three years.”

However, enthusiasm for Chinese stocks outside the country remains minimal: State Street Global Advisors reported that 87 percent of the $995 million that went into U.S.-listed emerging market stock ETFs in January were absorbed by funds with an investment objective that explicitly excludes China. .

U.S.-listed ETFs focused exclusively on China lost $304 million in January, SSGA said, bringing outflows over the past year to $3 billion.

“There have been concerns about China's relative economic prospects as well as political uncertainty,” said Todd Rosenbluth, head of research at consulting firm VettaFi.

“We have seen products like EMXC [the iShares MSCI Emerging Markets ex China ETF] “It will be quite popular, with $700 million of net inflows in January,” he said, while the smaller Columbia EM Core ex-China ETF (XCEM) received $100 million.

Column chart of monthly new flows ($ billions) showing emerging market equity ETF flows hit record high

Overall, net inflows into global ETFs reached $107.5 billion in January, according to BlackRock, down from $170 billion in December, but still a strong start to the year.

The main global trend was the continuation of the “embrace risk” mantra that emerged in the last quarter of 2023, particularly in corporate debt.

“Investment grade [corporate] “credit stole the show in January,” said Karim Chedid, head of investment strategy at BlackRock's iShares division in the Emea region. Inflows reached $14.6 billion, their second-highest level in history, surpassed only in June 2020, when markets recovered from their Covid lows.

Chedid linked the purchase to the broader global disinflationary context. “We're seeing investors taking full duration risk on credit exposures,” he said, referring to investors' desire to look for bond portfolios whose price is very sensitive to changes in interest rates.

“This is the year of disinflation and interest rate cuts, so it makes sense to take comfort in taking full duration risk in a year where we will likely see rate cuts mid-year,” he added.

U.S.-listed ETFs accounted for $9.2 billion of inflows, up from $5.9 billion in December; VettaFi data indicates that the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) attracted $3.3 billion of this, and the Vanguard intermediate-term corporate bond. ETF (VCIT) $2 billion.

Column chart of monthly new flows ($ billions) showing strong demand for investment grade corporate bond ETFs

“We saw, going into the new year, that investors were becoming more comfortable taking on interest rate risk and some credit risk,” Rosenbluth said of the U.S. market. “They were confident that 2024 would be a year of economic growth in the United States and that the Federal Reserve would cut rates at some point, and quite aggressively, many people thought.”

However, this sentiment has taken a hit, with investment grade flows reversing in the US earlier this month.

“The Fed seems to be saying they're not going to cut rates as aggressively as the market expected,” Rosenbluth said. “Expectations changed for some people and that is why we have seen, in the first days of February, that some of that [money] “He has bled to death.”

This is consistent with BlackRock's view that returns from taking on duration risk are likely to be higher in Europe than in the US this year.

“There is more room to extend duration risk in Europe, if you think about the market pricing of rate cuts this year,” Chedid said. Not only do market prices suggest the European Central Bank will cut rates five times, a fraction more than the Federal Reserve's 4.5, but “we believe the ECB has a better chance of delivering on these rate cut expectations.” because there are fewer signs of Inflationary pressures and growth are weaker,” he added.

The mystery of ETF investors' waning appetite for gold, despite its decent performance with a 13.7 percent rise in dollar terms last year, also deepened amid continued outflows.

After $2 billion more sales in January, SSGA estimated cumulative outflows at $6 billion in the U.S. alone over the past year, and Matthew Bartolini, head of research at SPDR Americas, called it a “missed opportunity for those who redeemed.”

Chedid believed a change of course was likely, stating that “in an environment where there is still macroeconomic uncertainty, [gold] is still the one [area] where I would expect some demand.”

However, Rosenbluth believed that the long-awaited launch in the United States last month of ETFs that invest in spot bitcoins – called by some “digital gold” – meant that demand for real gold could remain muted.

“Space in a wallet is limited. The alternatives segment now has more competition,” she said.

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