French are socialists, Greeks are lazy, Europeans are bad at capitalism…
No, I am not trying to insult readers. These are just three of the reasons I have been given by investors in the past why they wouldn’t invest in certain foreign stock markets. And these are just the ones that can be printed…
Obviously, these clichés are nonsense and by excluding certain markets or stocks from a portfolio based on such clichés, investors are forgoing diversification and potentially higher returns. But Baixiao Liu and Linlin Ma from Peking University have documented that such kneejerk reactions are common enough to affect fund flows based on negative media reports about certain countries.
They found that when US media reports negative economic news about a specific country, fund flows in US-domiciled funds focusing on these countries see an excess outflow of 0.35% of assets under management. Hilariously, when a country is in the news for non-economic reasons, the outflows are even larger at 0.5% of assets under management.
Who would go and sell a fund focusing on Chinese stocks, for instance, because there is negative news about political events in China? Not professional investors. In fact, the fund flows from institutional investors are unaffected by negative economic or non-economic news about a country. Retail investors, meanwhile, react strongly to this kind of news coverage. To quantify it, retail investors are about 5.8% more likely to redeem their fund holdings in a country-specific fund on the day negative news about that country hits their social media feed or their TV screens. And still, some people insist that retail investors aren’t noise traders…
I agree that crude stereotypes are lamentable. As a long term investor I do not “trade” hardly at all; certainly not on “noise”.
However, I avoid China entirely - because it is run by a horrible dictatorship. Beyond that you have risks of (1) CCP interference with companies or confiscation; (2) the laughable accounts.
I avoid Eurozone as the Euro is unsound (needs fiscal control as well as monetary) but am content if my ITs hold good quality stocks. I hold Swiss index. More than happy with East & South Asia exc China. But in the end “Never bet against America”.
Just my view.