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As China slips, the second-half performance for many emerging market mutual funds might soon follow.
In recent months, investors have been pulling hundreds of millions of dollars out of stock funds that invest mainly in companies associated with the big four emerging market nations of Brazil, Russia, India and China.
But it's China that is causing most of the worry for fund investors, amid signs that the world's second-largest economy is slowing more sharply than expected.
Even emerging market bull Jim O'Neill, chairman of Goldman Sachs Asset Management, who famously coined the BRIC acronym, said he's been a bit surprised by the slowdown in China. But that said, O'Neill remains convinced China's economy will be more than enough to make up for any weakness in the other BRIC nations.
"It is making the trajectory that I predicted is difficult to stick with," O'Neill said about the slowdown. But he added, "I find it hilarious that people question the thesis on the basis of two quarters."
The second quarter was not kind to BRIC-focused stock funds, with investors redeeming US$787 million during the period, according to fund tracking firm EPFR. Chinese-focused funds were hit particularly hard, with investor redemptions totaling 88 percent of the US$1.6 billion in new money those funds took in during the first quarter.
The rush of money out of Chinese funds comes as institutional investors are dialing back growth estimates. In a recent report, Ray Dalio's Bridgewater Associates attributed "about half" of the slowdown in global growth "to the slowdown in China."
Year-long high
One sign of the Chinese slowdown can be seen in China's purchasing managers index which dropped to 50.2 in June after hitting a year-long high of 53.3 in May. The growing concern about China and slower growth in the other BRIC nations is also starting to show up in the performance of some United States emerging markets funds and hedge funds focused on Asia.
Mutual fund industry tracking firm Morningstar says US emerging market stock funds were up 4.61 percent as of June 30, compared to a 5.51 percent gain for non-emerging market stock funds.
China-focused US mutual funds are up 2.9 percent, lagging behind the 4.15 percent gain recorded by diversified emerging market stock funds, according to Morningstar data.
The benchmark S&P 500 index, meanwhile, is up about 7 percent this year.
Some Asia-focused hedge funds that go long and short stocks are posting mediocre numbers. HSBC Private Bank reports the Chilton China Opportunities Fund was up a little under 1 percent as of June 22, while the Pinpoint China Class A Fund was up about 1.3 percent over the same period.
Performing far better
As a whole, however, emerging market stock funds are performing far better than last year, when the group posted a 20 percent decline. But after a fast 13.1 percent increase in the first quarter of 2012, emerging market funds as a group gave back more than half of those gains in the second quarter.
Now the worry is that with China's economy slowing, emerging market funds may see further losses in the second half of 2012, especially if other BRIC nations have even slower growth.
Bill Rocco, a Morningstar analyst, said China is showing that it is vulnerable to the financial crisis in Europe and the less than robust economy in the US. "I'm always wary of people trying to pick this market or that market," he said.
On top of that, some investors are beginning to become more cautious about China's growth estimates.
Cameron Brandt, director of research for EPFR Global, said investors are showing "growing discomfit with official statistics" from China.
Then again, recent history suggests that emerging market countries will still outperform the rest of the world. From 2009 to 2011, the economies of the BRIC nations grew at rates that were 2 to 3 percentage points higher than most other nations, including Europe and the US.
BRIC boosters like O'Neill point out that even if China's growth slows it will still far outpace the average 2.8 percent growth recorded last year by the G20 nations. The most recent World Bank estimate is that China's gross domestic product for 2012 will be 8.2 percent.
