The global markets are continually evolving, and our investment strategy remains focused on thoughtful, intentional decisions that balance risk and opportunity. After reviewing global market conditions, we are shifting our emerging market investment away from China and toward India’s growing economy. The following three factors particularly stand out as to why.
China’s Economic Challenges
China’s ongoing economic troubles include its struggling real estate sector, high debt, low consumer confidence, and decreasing foreign investment. At the same time, local governments are financially strained, leading to wage cuts and service reductions, which only adds to the country’s instability. On top of that, China’s lack of transparent financial reporting makes it difficult to evaluate the market with confidence, limiting investment potential. Adding to these concerns, the country’s population is aging faster than other major economies, creating long-term demographic challenges.
India’s Economic Rise
As China’s economic growth slows, India is emerging as a compelling alternative for investment. Many experts expect India to take the lead in emerging markets, driven by its younger workforce, rapidly growing middle class, and a strong focus on technological innovation. India is also deepening its ties with the West, further strengthening its position ahead of China. Global market trends reflect this shift, reinforcing our decision to reallocate investments toward India’s rising economy.
China’s Geopolitical Concerns
Beyond economic stagnation, China’s geopolitical position is adding another layer of uncertainty. Rising cybersecurity threats, global trade tensions, and close ties with Russia and North Korea present significant risks for investors. These concerns aren’t just theoretical but are driving real action, with several U.S. states, including Texas, Florida, and Indiana, choosing to remove public pension funds from Chinese investments.
The next four years could bring increasing tensions between the U.S. and China, potentially impacting the market and stability. With these risks in mind, we believe moving investments away from China is a strategic move to help protect portfolios from increasing instability and uncertainty.
At Brown Financial Advisory, our team is committed to adapting strategies so investments remain well-positioned for growth and confidence. Moving away from China is a significant change in the portfolio but it is part of our long-term and calculated approach to managing emerging markets. For an in-depth explanation of why we are shifting our strategy, please watch the video below.
Our team guides your investments with trust and care by following a common sense approach to investing. Now is the right time for this change, and we are optimistic about what opportunities are ahead. Please get in touch with us if you have any questions. We’re here to support you.
Audio Transcript:
00:00:00 – 00:20:18
Scott McLeod
Hi, this is Scott McLeod with Brown Financial Advisory. Thank you for taking just a few minutes to allow us to discuss with you what’s happening in the portfolio right now. And specifically with emerging market stocks. We have some concerns with regards to China and some of the things that are happening in our geopolitical environment, but also in their economic headwinds.
00:20:23 – 00:44:06
Scott McLeod
We’d like to share with you that we plan to get the portfolio away from China, and there are some significant changes, but we wanted to share with you the reasons for those changes before we make them in the portfolio. Of course, I’m Scott MacLeod, but I’m also joined today by Josh Lancaster. Josh is our chief investment officer and has been working in the industry for over 25 years.
00:44:09 – 01:04:04
Scott McLeod
He’s going to share some of the specifics with regards to what’s happening in China and how it impacts our portfolio, and why we feel it’s important for us to make these changes. First, there are some disclosures, and then I’ll share a big picture view of what’s happening. First of all, we’d like to recommend that we move the portfolio away from China.
01:04:06 – 01:33:20
Scott McLeod
This means selling our emerging market positions and reinvesting in something that is an ex China position. And the reason for that basically falls in three categories. Number one, we feel like there are economic headwinds in China that really can’t be overcome in the short term. They have demographic issues where their workforce is aging and the lack of transparency and some other things in their accounting methods that we really feel like are going to handicap China going into the next decade and maybe even beyond that.
01:33:22 – 01:54:16
Scott McLeod
The second thing is, is that we really feel like that India is the next super star in the emerging market space. The more money we have invested in China, the less we can invest in India, and we would rather focus our energies on that in an economic environment because they, frankly, are friends with the United States and also growing at a really rapid rate.
01:54:16 – 02:21:05
Scott McLeod
We feel like that their technology focuses, and some of the things that are happening in India will really bode well for the portfolio. And finally, we think there are serious concerns with the geopolitical environment and what’s happening with China and the United States. The Trump administration has not been friendly to China in the past, and it appears that the Chinese government has been using, international hackers for purposes of espionage and also to undermine our infrastructure.
02:21:12 – 02:49:03
Scott McLeod
And they also have a very strong relationship with Russia and South Korea, both of whom have sworn, against the United States. So there are some very serious concerns in our emerging market space surrounding China, and we’ve decided to make this move in the portfolio as a result of those concerns. But I will let Josh right now share a few more specifics with regards to the portfolio, and he’ll tell you exactly what we’re thinking with regards to the Chinese market.
02:49:06 – 03:16:17
Josh Lancaster
Thanks, Scott. The first issue we want to talk about is China’s economic troubles. As you may know from the headlines, bullet one points out China’s real estate bubble and crushing debt. China has been trying over the years to boost its economic standing among the world’s biggest economies. But money supply growth is cratering. Purchasing indices are slowing. Foreign investment has just about stopped.
03:16:19 – 03:48:27
Josh Lancaster
And consumer confidence is terrible. The government has tried various stimulus packages over the years, but to minimal effect, the government could alleviate its housing crisis. There’s too much supply by issuing bonds and purchasing the oversupply, but that would exacerbate its already high debt levels. Book two talks about, many Chinese local governments are cash strapped. So basically, these local governments are having to cut services and wages.
03:49:09 – 04:19:09
Josh Lancaster
Especially in, such critical areas as health and infrastructure. This has been leading, to many protests, actually, across the country. And one example is a protest in last October by, dozens of medical staff in the city of Shen Way, on China’s southeastern coast. Medical staff actually took over, the whole of the public hospital there to demand wages and bonuses that have not been paid.
04:19:12 – 04:41:04
Josh Lancaster
And when you look at vol three, this is an issue that we have been dealing with for a very long time. That is the lack of transparency and the interference by the Chinese central government. With many economic stats like gross domestic product or GDP. This makes it difficult to trust the metrics that the markets use in their valuations.
04:41:06 – 05:09:28
Josh Lancaster
And this also means that China will not be awarded developed market status until its markets and accounting systems become more transparent. Next issue we want to talk about is China’s demographic troubles. China’s population is aging faster than other major economies. The graph on the left of the page here, it shows the projected increase in people over 60, with China definitely leading the way on that.
05:10:00 – 05:44:01
Josh Lancaster
While the chart on the right shows it, China has now dipped into negative population growth or more deaths than births. The negative population growth is mainly from its one child policy from 1980 through 2015, which the government has had a hard time overcoming, even with incentives for families to grow. You now have more retirees then you have new workers, which of course leads to bullet to pension coffers are running low and less goods and services are being produced.
05:44:03 – 06:07:22
Josh Lancaster
Next issue we want to discuss concerns, the emerging market space and who really is the poster child or leader in that space. In bullet one, we say that India is actually expected to replace China as that leader in emerging markets. In the graph on the right actually shows the percentage for China and India of the MSCI Emerging Markets Index.
06:07:24 – 06:33:20
Josh Lancaster
And as you can see in that graph, China’s weight has been coming down since 2020 while India’s weight is on the way up. So why is this? Well, we talked about that in bullet point two, which says that India has a younger demographic, a growing middle class, a focus on technological innovation and a link to the West. Well, contrast this with China’s aging demographic.
06:33:22 – 07:03:26
Josh Lancaster
A property slump and protectionism from the West. The graph on the left shows this bifurcation in outlook for these two countries. The graph shows where their global economies are facing long term headwinds or tailwinds. Long term tailwinds and headwinds are based on factors such as debt demographics and innovation. Near-term tailwinds and headwinds are based on things like labor, housing, spending, investment, and financial stability.
07:03:28 – 07:38:07
Josh Lancaster
As you can tell from the graph, India in the upper right quadrant is benefiting from both long term and near-term tailwinds, while China in the lower left quadrant is facing all headwinds. And in bullet point three, we talk about how there are some U.S. states that have instructed their public pension plans to remove Chinese investments. Those states currently are Indiana, Florida, Missouri, Oklahoma, Kansas and Texas.
07:38:10 – 08:15:04
Josh Lancaster
Look at the issue we want to discuss is how China is a threat to the United States. And I am grateful for the Wall Street Journal’s coverage of these issues in bullet one. We note that the Chinese government is involved in espionage against Western governments, companies, and citizens. In fact, we found out in 2023 and 2024 that hackers working for Chinese intelligence have been able to do things such as gain the ability to shut down dozens of U.S. ports and power grids, and also access cell phone lines used by US government.
08:15:05 – 08:39:27
Josh Lancaster
Senior national security and policy officials inability three. We know that Chinese ships have been accused of cutting undersea cables to disrupt data communications. And finally, China has close military relationships to North Korea in Russia’s war with Ukraine. Both Russia and North Korea are avowed enemies of the United States.
08:39:29 – 08:58:27
Scott McLeod
Thanks, Josh. So to summarize, there are three bullet points again that we’d like to emphasize. Number one, we’re concerned about the Chinese market and its ability to grow from here. Their demographics are terrible. Their lack of transparency is awful in the global view. So we really don’t think the potential in China is that great over the next 5 to 10 years.
08:59:04 – 09:18:15
Scott McLeod
Second, we think that the Chinese market, because they are at this point of economic stagnation, is not the right emerging market to be involved in. We’d like to focus our energies elsewhere. They’re not the superstar that they’ve been for the last 20 years, and we think there’s an emerging superstar in India and we would rather focus our attention there.
09:18:18 – 09:37:02
Scott McLeod
And then finally, we are a little bit concerned about China and their threat to the sovereignty of the United States. They’re hackers. The aggressive nature that the Chinese government has shown recently. We’re concerned that the next four years for the Trump administer nation may be a challenge, and it will probably be reflected in the Chinese market as well.
09:37:06 – 09:45:05
Scott McLeod
So we would rather dial away from that and potentially find opportunities in other parts of the portfolio.
09:45:08 – 09:59:14
Scott McLeod
Thank you for the opportunity to share these thoughts with you. Please let us know if you have any questions. We’re happy to hear from you. This is a big change in the portfolio, but we think it’s good timing for this change. We look forward to seeing what happens in the opportunities to come. Thank you again.