June is turning into an explosive month for markets.

The broad-based S&P500 is on a tear. Trading around 4,400 points, the broad-based index is up 3% on the second week of June, its biggest weekly gain since March. The coming weeks will see whether it has support to keep pushing up toward historical highs of 2021 – at around 4,750 points.

Yet outside the main market buzz, things are different for other investing themes. The MSCI China index, which tracks China’s biggest companies, has remained flat, hovering under $50 for most of the year, a far cry from its 2021 historic high of $96.

Meanwhile, after a shaky 2022, ESG funds seem to be on the mend. Last year, large ESG funds, on average, trailed the S&P 500 by about 2.4 percentage points (including dividends). Fortunes may be reversing, though. iShares ESG MSCI USA Leaders ETF, for instance, is up 16.3% year-to-date, outrunning even the S&P500 by about one percentage point.

While the AI-fuelled bull run may have Wall Street’s eyeballs on the Nasdaq, do these other spaces offer a timely buy?

Many passive investors may habitually gravitate toward the top broad-based ETFs, yet both China and ESG are major investing themes that can offer new avenues for growth. This article will take a look at where the market is on ESG and China-focused funds and consider some expert opinions on investing in these areas this year.

Enter The Dragon

Chinese stocks are not having a stellar year so far. Even now that last year’s COVID lockdowns have long gone, the country’s mega-caps have still not regained their former mojo.

There are numerous factors weighing down China’s equity prices. Persistent debt risk from the country’s enormous property development sector is fretting investors. China’s deteriorating diplomatic relations with the Western world are also a concern. China’s growth outlook is faltering again after earlier signs of a promising post-COVID recovery in previous quarters. A weakening yuan is also not helping.

Yet, could this be a golden chance to get in at a low price and go long on China?

“Investing in China has the potential for high returns due to its large market and rapid growth. However, it also comes with risks,” says Jorey Bernstein, Founder of Bernstein Private Wealth.

“These include regulatory risk, where the Chinese government can change rules or impose new ones that can impact companies’ operations; geopolitical risk, where tensions between China and other nations could impact economic conditions; and transparency risk, where Chinese companies may not provide as much information as those in countries with stricter disclosure requirements.”

For those investors who want some exposure to the world’s second-largest economy, there are a number of choice China-focused ETFs.

“I advise clients interested in Chinese stocks to consider diversified ETFs or mutual funds, which can spread the risk across many companies. Examples include the iShares China Large-Cap ETF (FXI) or the SPDR S&P China ETF (GXC).”

ESG Is Back

ESG had a rough 2022, to say the least. Russia’s invasion of Ukraine triggered a major disruption to energy supply chains, pumping major oil stocks’ prices. Out of the 11 S&P 500 sectors, only energy – dominated by oil majors Chevron and ExxonMobil – finished higher after last year’s downturn.

So while regular funds had a downer of a year, their losses were still offset somewhat by the strong growth in traditional energy. Not so for ESG funds which typically have no exposure to the oil and gas sector.

The new year has seen a turnaround. Despite a brief outflow caused by March’s banking scare, ESG equity funds ended the first quarter with net positive inflows, eclipsing non-ESG funds, which lost money overall.

Tech stocks have bounced back with a vengeance this year. ESG funds usually hold more technology in lieu of oil and gas firms. Investors may also see sustainable companies as more competitive now that the recent U.S. Inflation Reduction Act is in force and lowering the cost of rolling out a lower-carbon economy.

“The other real driver is the strong demand from asset owners and retail clients. There remains robust demand to be invested along ESG thematic ideas such as biodiversity and climate transition,” Charles Boakye, ESG strategist at Jefferies, told Reuters. 

For those interested in investing in the top sustainable ESG funds, there are numerous options available to investors interested in ESG. The iShares ESG MSCI USA Leaders ETF (SUSL), for example, invests in U.S. companies with strong ESG ratings. In addition, the iShares Global Clean Energy ETF (ICLN) invests in global clean energy companies.

These funds provide ways to support in line with one’s values while still seeking a return on investment.

Big Wide World

While these are major investing themes, looking at what else is available is important.

For decades, China was the emerging market to be in. That’s no longer the case, though, as the rest of the developing world comes of age.

“Besides China, emerging markets like India, Brazil, and Southeast Asian nations could present opportunities for investors seeking growth. However, these markets also come with increased risk,” says Bernstein.

Beyond ESG, industry-specific funds can also deliver investors growth from some of the fastest-growing pockets from the most innovative corners of the economy.

“Themes like technology, healthcare, and clean energy have the potential for future growth globally. ETFs and mutual funds focus on these areas, such as the Global X Robotics & Artificial Intelligence ETF (BOTZ) or the Health Care Select Sector SPDR Fund (XLV),” Bernstein adds.

Both ESG and China-focused funds have become major assets in the global investment landscape. ESG caters to investors’ growing demand for sustainability, while Chinese stocks offer exposure to the world’s second-largest economy. However, properly evaluating risks like regulatory shifts, geopolitical pressures, and corporate governance is crucial. Also, despite the enormous potential in these areas, future returns are uncertain. Diversification, research, and a long-term horizon can all help investors hedge against unknown risks and maintain balance in their asset allocation.

This article was produced and syndicated by Wealth of Geeks.

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