90% of the top 30 largest EM funds are currently underweight on China

In its latest global liquidity tracker report, Elara Capital noted that 28 out of the top 30 active EM funds are underweight on China by a total of $14.2 billion (4.5%).

Amid nervousness about a potential 'Sell India, Buy China' trade taking root among foreign investors, data from Elara Capital reveals that 90% of the top 30 largest EM funds are currently underweight on China. Among the top 450 funds, the median underweight stands at 3.1%.

In its latest global liquidity tracker report, Elara Capital noted that 28 out of the top 30 active EM funds are underweight on China by a total of $14.2 billion (4.5%). If one large fund with an extreme positioning is excluded, the total underweight drops to approximately $10.5 billion (3.5%), the report stated. "If funds don't rebalance and China’s weight continues to rise, it could further widen the deficit," the report added.

The report also highlighted that nearly 80% of the top 450 EM funds are underweight on China, with an average underweight of 4.2% and a median underweight of 3.1%. The total underweight across all 450 funds amounts to around $32 billion. Active fund allocations have dropped to their lowest level since 2017, currently at about 19%, down from a peak of 38% in October 2021. "This will be a crucial metric to watch for China," the report emphasised.

The China underweight position is significant, as the stimulus-led rally in China is raising concerns among Indian investors that foreign funds may reduce their positions in the Indian market and increase their exposure to Chinese equities. Since the announcement of the Chinese Stimulus, the Chines markets have seen a runaway rally with the Shanghai Composite index gaining nearly 25% and the Hang Seng gaining 22.10%. Indian markets gained just under 2% during the period, more or less in line with the rest of the global markets.

Elara also noted that with the recent announcement, foreign inflows into China have expanded to a 14-month high of $992 million. “We have been mentioning that Chinese domestic inflow (supposedly state sponsored) has been very strong since May 23. Strongest patch of domestic inflow was seen in Feb 24- at peak of panic selling in Chinese markets. This was the phase when foreigners were selling heavily in China and moving into India and other EMs. Most of that supply was absorbed by domestic investors,” the report noted.