With a trade war looming between the US and China, now may not be the best time to consider buying domestic Chinese A-shares. Yet that is what emerging markets funds are obliged to do.
The inclusion in June and September of some 235 Chinese A-shares into the benchmark MSCI Emerging Markets Index means that funds which measure their performance against the index will be impelled to own at least some stocks listed on the Shanghai and Shenzhen exchanges.
For some this will be an adventure into terra incognita — and raises the obvious question of what to buy. Market valuations are high, with Shanghai’s average price-to-earnings ratio at around 18. Corporate debt levels are the highest in the world at about 170 per cent of GDP. Sudden corporate ruptures are fairly common.