Investors are being overly cautious and failing to make sufficient allocation to China as they are fearful about the regulatory outlook, according to BlackRock.
According to the BlackRock Investment Institute (BII), it was moderately overweight China as it believed regulatory risks would not intensify this year.
There were numerous regulatory headwinds last year as the Government clamped down on areas such as private education and technology while the collapse of China’s second-largest property developer Evergrande also sparked fears of this causing a wider crisis. There were also ongoing tensions in the US-China trade war which had been a problem since the tenure of former US president Donald Trump.
As a result, many investors and asset managers either exited or reduced their weighting to China to avoid holding affected companies.
However, BII believed these tensions would ease this year which would mean investors could find their allocations were now overly conservative and meant they could miss out on gains.
Yu Song, chief China economist at BII, said: “We believe the low starting point of global investor allocations to Chinese assets is at odds with the economy’s growing heft in the world. We estimate current allocations in global portfolios point to an overly negative economic outlook in coming years – such as a long-lasting growth shock akin to Japan in the 1990s.
“We maintain our long-term overweight to Chinese assets relative to low global allocations. We assume greater regulation over a strategic horizon as China balances social and economic objectives – one reason we bake in materially higher uncertainty and risk premia for China compared with DM markets. We recognize the risks, yet see current valuations as offering eligible investors adequate compensation for them.”
Chair of BII, Tom Donilon, added the midterm elections taking place in the US would make it likely the country would like to antagonise the situation with China.
“The US-China relationship remains confrontational, with seemingly little interest on either side to make any concessions. Military tensions are increasing over China’s nuclear capabilities and Taiwan.
“Yet we see the two countries generally seeking to lower the temperature in 2022 as both focus on domestic priorities. In the US, the focus is on managing the pandemic, implementing the administration’s spending plans, reining in high inflation and preparing for midterm elections.”
