Chinese equity surge catches global emerging investors off guard

Many global investors have been wrong-footed by a 7 percent surge in emerging market equities in April, as stellar gains in China lifted the benchmark index to its best monthly showing since early 2012.
Shares listed on China's mainland bourses have doubled in value since September, while the dollar-denominated MSCI China index has gained nearly 30 percent this year.
MSCI China shares listed offshore rose almost 20 percent in April, their biggest monthly rise since 2007, in a rally that was initially fired on mainland markets by signs that authorities would act to stem a slowdown in economic growth.
The sudden surge in MSCI's emerging equity benchmark allowed monthly gains to surpass the US S&P 500 for the first time since 2012. But the rally may have bypassed many investors.
Funds have been unenthusiastic about emerging equities, whose performance has lagged developed peers since end-2010. Over half of global investors surveyed by Bank of America/Merrill Lynch last month said they would prefer to have an underweight position on emerging markets in the coming year.
They cut positions further in early April, with a net 18 percent underweight, meaning allocations to the sector were less than its weight in global indexes.
Chinese equity positioning probably was even more extreme. An analysis by Goldman Sachs of investors with $1 trillion in assets showed that Asia ex-Japan funds were a whopping 600 basis points underweight China at the end of March.
That means the average allocation to China was 6 percentage points below the country's weight in a benchmark index.
Global funds and dedicated emerging equity funds were 140 bps and 320 bps underweight respectively, Goldman said.
"Many active managers were hard hit by this rally in China. It's the sort of rally a lot of investors, unless they had a real value bias, would not have caught in the slightest," said Emily Whiting, a client portfolio manager at J P Morgan Asset Management in London.
As a result, only 20 percent of emerging equity funds and 40 percent of ex-Japan Asia funds outperformed their benchmarks this year, Goldman calculates, contrasting this with an average 60-70 percent in the past five years. "Managers who have been underexposed to China have had few alternatives to offset China's performance," analysts at the bank said, noting that Russia and Hungary were the only other emerging markets to do well in this period.
Bearish China positioning is explained by the dismal returns funds endured through a decade of booming growth. Now, however, a slowing economy holds out the promise of more stimulus, with some even predicting a bond-buying programme.