by Vicki Simpson, Trading Analyst, SoundView Advisors

There are many headlines competing for our attention as investors, but few stir as much concern as news about China. Recent events, including swift regulatory changes in the online education sector, sent Chinese stock values tumbling as investors quickly reacted. As a result, emerging market funds struggled and posted negative returns in the month of July.

SoundView tracks performance of emerging market funds against the MSCI Emerging Market Index. China currently represents approximated 34.62% of this benchmark index. Here are some performance values* which may reveal some of the impact China has had on this market.

July 2021: the MSCI EM index was down -6.73%.
From its 2021 high in mid-February to its low in July, the index saw a 10% drop.
Year to Date: the MSCI EM Index is positive, but only .54%.
In 2020: the MSCI EM Index posted gains of 18.31%.

We currently utilize active managers for Emerging Markets in the SVA core portfolio, and they have more flexibility to adjust their China exposure or reallocate capital away from industries or sectors that are at higher risk for regulation or mandates. Across SoundView portfolios, total exposure to Emerging Markets represents between 9% to 12% of the portfolio. The net exposure to China represents about 2.4%-4.8% of the portfolios.

I have been in communication with all our emerging market fund managers, as well as our global and active international managers. The consensus is China has been, and will continue to be, inherently risky, but there is still opportunity to invest in China as the economy continues to grow and government policies favor their expanding middle-class consumer base.

SoundView’s Investment Committee is evaluating our allocation to emerging markets considering the risks and volatility mentioned above. The primary questions we are addressing:

Is our allocation to emerging markets, given the underlying weighting to China, adding more risk than is appropriate for a client’s investment objective? If so, how do we adjust the portfolio to reduce that risk?

The change may be quite small and require few or no trades as emerging market values have already fallen relative to US and international markets within portfolios. We will communicate upcoming changes, if any, that are approved by our Investment Committee in the coming weeks. As always, feel free to reach out to me or your Advisor if you have any questions.

*Sources: MorningStar and www.msci.com