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Investors Cautious About China’s Emerging Market Status

As concerns grow regarding the sustainability of China’s economic model, investors are advised to consider reducing their stakes in what has long been perceived as the largest emerging market.

Perth Tolle, the founder of Life + Liberty Indexes, is vocal about her apprehensions regarding China’s unique brand of capitalism. In a recent appearance on CNBC’s “ETF Edge,” she expressed skepticism about the assumption that economic growth would naturally lead to democratic reforms. “Economic freedom is a necessary, but not sufficient precondition for personal freedom,” she stated.

Tolle manages the Freedom 100 Emerging Markets ETF, which has remarkably surged over 43% since its inception on May 23, 2019. This year alone, her ETF has witnessed an increase of 9%, in contrast to the iShares China Large-Cap ETF, which, while tracking major Chinese stocks, has only risen by 19%.

Interestingly, Tolle’s fund has never included investments in China. “I prefer to focus on emerging economies that prioritize freedom,” she explained, emphasizing the idea that a lack of freedom can stifle economic growth.

Personal Insight Drives Investment Philosophy

Tolle’s personal experiences lend weight to her investment philosophy. Having spent part of her childhood in Beijing, she recalls her early years at Fidelity Investments in 2004 when her clients overwhelmingly desired exposure to the Chinese market. “I didn’t want to personally be investing in China at that point, but everyone else did,” she remarked, reflecting on the strong demand she witnessed.

She also highlighted a contrasting sentiment from clients interested in investing in Russia, with one stating, “I don’t want to invest in Russia because it’s like funding terrorism.” This hindsight, she believes, showcases the foresight and caution that can arise from firsthand experiences.

Market Perspectives

Tom Lydon, a seasoned ETF investor and former head of VettaFi, shares Tolle’s cautious outlook on China. He noted that avoiding investments in China has resulted in reduced volatility and enhanced performance for investors looking at broader emerging markets. “If you look at emerging markets… by not being in China from a performance standpoint, it’s provided less volatility and better performance,” Lydon articulated.

The prevailing sentiment among these experts suggests that investors should carefully weigh the risks associated with China, especially in light of shifting political and economic dynamics both domestically and on the global stage.

Source
www.cnbc.com