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This Asia Ex-China Trade Isn't Working Out


So you put all your Asia money into anything but China, hoping that the trade war would reallocate capital to countries like Vietnam. It looked like a no-brainer bet, a good way to hedge against the slow death of the China export story.

If you did, whatever you do, never look at a chart comparing investments in Shanghai and Shenzhen listed stocks with anything in southeast Asia. Or the MSCI Emerging Markets, for that matter. This Asia ex-China trade isn’t working out.

Tuesday’s hopes of yet another trade war white flag is also keeping China in the game. Love it or hate it, China is the world’s No. 2 economy. It can’t be ignored. It has hundreds of millions of people buying life insurance and playing video games. Investors eat that up. Moreover, China’s economy is bigger than everything in southeast Asia. Its stock market has much more to choose from, too.

Here’s a look at how the short China, long Asia trade has worked this year based on the gains of the popular exchange traded funds for those countries.

The Deutsche X-Trackers China CSI-300 A-Shares (ASHR) ETF is up 28.4% year-to-date. The next best investment for this year so far within emerging Asia was the iShares MSCI Singapore (EWS), up 10.2%.

Singapore is a standout as it is the only other emerging Asia equity market to beat the iShares MSCI Emerging Markets (EEM), which is up around 8.5%. The rest of southeast Asia is underperforming.

VanEck Vectors Vietnam (VNM) is up 8.3%. This is the country everyone has been singling out as the biggest beneficiary to supply chain movement since the trade war began.

After Vietnam is the iShares MSCI Thailand (THD) fund, up 5.2%. VanEck Vectors Indonesia (IDX) is down 0.6%, and iShares MSCI Malaysia is the worst of the lot, down 6.4% year-to-date.

China’s A-shares beat all of those markets over the last 12 months, too.

See: China’s Great Wall Of Money — Forbes

Sometimes it’s because the construction of the ETF is too heavily weighted towards one industry, an industry that is not set up to benefit from certain trends—like the expanding middle-class trend. Or the China supply chain derivative trend, which might not really be a trend yet. The index construction can make it harder to benefit from certain themes.

VanEck’s Vietnam fund has 25 stocks. It’s top six account for 40% of the portfolio. They run the gambit from flexible printed-circuit-board manufacturers geared up for export to dairy companies serving the locals. Still, Vietnam as an investment story has yet to register this supposed shift of supply away from China.

“It’s hard to reject China as an investor,” says Crit Thomas, global market strategist at Touchstone Investments. “Even with the trade war, there has been huge growth in sectors of the Chinese economy like biotech, for instance. Consumer spending has held up. Within China you’ll find companies to invest in that don’t come with obvious trade war risk.”

Why China Still Looks Good

There are a handful of reasons for this. One is that China securities are being added to major indexes worldwide. Benchmarked funds, especially passive funds, are basically mandated to invest in China whenever the index increases its weighting to China stocks and bonds.

From the trade perspective, China is still the only game in town in Asia. It has the low tax rates, the labor base, the logistics. No one compares.

Trade negotiators from China and the U.S. held a telephone conversation early Tuesday, agreeing to stay the course with the phase one mini-deal, China’s Ministry of Commerce said, according to the South China Morning Post.

Global stocks rejoiced yet again on the news, hitting another record high in the U.S. China stocks rose half a percent.

UBS’s house view on the matter is that investors should be cautious about trade headlines, with researchers writing in a note to clients today that the final outcome remains hard to predict.

The UBS research team, led by CIO Mark Haefele, wrote that “the lack of a deadline for signing a deal (suggests) that talks could extend into next year.”

In the meantime, the market’s insistence that the trade war is coming to an end has pushed valuations higher in the U.S., while also pushing them higher throughout southeast Asia, now more expensive than China’s stock market.

Investors are pricing earnings growth way out into 2020, pushing up multiples and making stocks more expensive today than they were a few months ago.

Higher valuations are turning some investors on to value stocks. That doesn’t bode well for Vietnam, despite its lackluster performance against China. As of October 31, the MSCI Vietnam price-to-earnings ratio was 20.36 times, compared with 13.5 times for the CSI-300 China and the MSCI Emerging Markets Index, and 18 times for the MSCI All Country World Index. Vietnam is the most expensive of the southeast Asian markets, and one of the most expensive markets in the world. The S&P 500’s current P/E is 23.20 as of Tuesday.

MSCI Singapore is the cheapest from a P/E perspective, trading at around 12.9 times earnings ending October 31. Thailand, Malaysia and Indonesia are all pricey at 18 times earnings, keeping China on sale by comparison, thanks to the trade war.



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