ETF Investors Buy China Stocks as Market Falls

Passive fund investors have taken a contrarian stance in October, buying China equities as the market fell 8%

Emma Wall 6 November, 2018 | 12:25AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar's Director of ETF Research for Asia, Jackie Choy.

Hi, Jackie.

Jackie Choy: Hi, Emma.

Wall: So, it's been quite a challenging month, October, for global markets and in particular, emerging markets. What's happened in China?

Choy: Well, it has been a very gloomy market all over the world. If you look at like the emerging markets, pretty similar sort of fall compared to the global markets. S&P 500 dropped about 7%. If you look at the EM, they dropped around 8%, 9%. In China, we saw like drops of around like 8% or so. So, pretty much similar that kind of drop all over the world.

Wall: There was one market that stood out, however, that did manage to make gains in October and that was Brazil, wasn't it?

Choy: It was quite an outlier if you look at the sort of kind of magnitude. It was a positive return of 17% right after their general election.

Wall: And how have investors been reacting to the fall across Asian markets and in particular, China? Because traditionally, sometimes, the volatile markets and falling markets can see investors abandon the funds and ETFs through fear?

Choy: Well, this time, fear didn't affect the ETF markets for China equity exposure. So, it was actually the other way round where we saw inflows into the China equity ETFs around the world outside of China. So, if you look at the largest 10 ETFs with China equity exposure, we saw inflows of around $1.2 billion.

Wall: Into those ETFs?

Choy: Into those ETFs, yeah.

Wall: So, people are using this opportunity to perhaps snap up a bargain?

Choy: Perhaps.

Wall: And what about at the macro level? Because I know the Chinese government and the People's Bank of China have been making some moves to potentially or to hope to stimulate the market, haven't they?

Choy: That's right. People's Bank of China actually reduced their reserve requirement ratio for the fourth time this year. So, pumping liquidity into the market. So, this time, 1.2 trillion renminbi into the market.

Wall: And this is a time when other markets across the world, for example, if you have a look at the US, are indeed tightening. But China is actually easing and potentially that means we should start to see the trickledown effect into market sometime next year.

Choy: Potentially. Well, it's actually quite sort of disconnect between the different markets. So, you saw, like US raising rates. Actually, a lot of the EM markets have been raising rates. But you saw like also these trade wars going on there, China cutting reserve ratio pumping liquidity into the market.

Wall: Jackie, thank you very much.

Choy: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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