Is it the right time to invest in China?

Headline numbers would suggest everything is tip-top in China. It remains the world's second-largest economy; it clocked a better-than-expected GDP growth in the first quarter of 2024; its company earnings, especially in the industrials, utilities and IT, are expected to rebound, according to Goldman Sachs; and its global share of manufacturing may be higher (at 38 per cent) than it was in 2020 (around 35 per cent) despite the West's China + 1 policy, as per Economic Times.

Upon closer inspection, though, you'd find some home truths about the country. Its real estate, comprising nearly 20 per cent of its economic activity, remains down in the dumps; its post-pandemic bounce has been underwhelming; consumer confidence and unemployment are down to their knees. Its foreign relations with the West and Taiwan have soured as well. Unsurprisingly, foreign capital outflow was the highest in April 2024 since 2016.

Given the current uncertainty, the Chinese equity market has slacked in recent years. And so have the Indian funds that invest in the Chinese equity market. Currently, around 15 China-focused funds oversee Rs 3,400 crore of Indian investors' money, with Edelweiss Greater China Equity Off-shore Fund and Nippon India ETF Hang Seng BeES managing more than 50 per cent of total assets. Here is how these China-focused funds have performed compared to India's equity market.

• The Indian market (S&P BSE 500 TRI) has outperformed China-focused funds since 2021. BSE 500 TRI's five-year CAGR is 21 per cent as of July 11, 2024, compared to 7 per cent for Edelweiss and -2.7 per cent for Nippon.
  
• Edelweiss Greater China Equity Off-shore excelled in 2019 and 2020 but has lagged the BSE 500 TRI by a wide margin since then. Nippon India ETF Hang Seng BeES's performance is also similar, underperforming India's broad equity index for the most part.

The China-tracking funds have lagged at a world level, too. The two most popular China-focused funds have trailed the MSCI World Index by a wide margin. For the uninitiated, MSCI, or Morgan Stanley Capital International, is a benchmark that tracks the performance of equity markets across the developed world.

Our take

Although Chinese stocks are currently available at a significant discount, investing in them is like riding a dragon. They are thrilling but risky due to volatile returns.

While geographical diversification is ideal for investors, avoid country-specific funds like China. Instead, diversify or opt for more stable and mature markets like the US. We recommend the Nasdaq-100 for international exposure, as its companies have a global business presence, which ensures diversification.