Vanguard Backs Away From China

Vanguard Backs Away From China

March 16, 2022

Vanguard has called a halt to its plans to launch an actively managed China equity fund. The Vanguard China Select Stock was originally set to roll out during the first quarter of 2022. But earlier this month, the firm submitted a filing to the Securities and Exchange Commission declaring Vanguard had “decided not to continue with the launch of the fund at this time.”

As we wrote when the fund was first announced, China Select would have been a departure for Vanguard, being the firm’s first single-country fund—and it was striking that the Malvern, Pennsylvania, index giant had decided to take the plunge via an actively managed offering. It showed considerable trust in the prospective portfolio managers, Sophie Earnshaw and Mike Gush of Baillie Gifford and Bo Meunier from Wellington.

What’s behind the volte-face? Vanguard declined to make a public statement on the matter, though the firm told Citywire it was open to exploring a possible future launch date.

The recent performance of the Chinese equity markets is certainly one reason Vanguard may have gotten cold feet (or feared investors would): The MSCI China Index, a measure of large- and mid-cap Chinese stocks, is down 25.4% year-to-date and fell 22% in 2021, as compared to the S&P 500’s year-to-date decline of 12.4% and gain of 26.9% in 2021 (all figures are price-level returns, as of Monday’s close).

But it may well be that Russia’s invasion of Ukraine caused the shift. Putin and China’s Xi Jinping have tightened their bonds in recent weeks, even as the Russian invasion has brought widespread condemnation and roiled economies the world over. Meanwhile, Vanguard announced earlier this month that it has stopped buying Russian stocks.

The China fund may simply have been a bit too much risk for Vanguard to take on, considering it had already backed away from its corporate growth plans in the region last year. We think most investors would be wise to follow the firm’s lead: In times of economic turmoil, markets as opaque and subject to political pressures as China’s are risky waters to swim in.

Chart of the Week: Will High Gasoline Prices Lead to Recession?

We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found informative.

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso 

As was drilled into me in Econ 101, two factors drive prices: Supply and demand. The past two years have certainly provided professors of the dismal science ample real-world examples we can all relate to—particularly at the gas pump.

If demand dries up, then prices fall. During the initial COVID-19 economic lockdown in the spring of 2020, demand came to a screeching halt. Working from home meant a lot less driving. So it was no surprise to see gasoline prices fall to around $2 per gallon, the lowest level since the global financial crisis in 2008.

Lately, we’ve seen the flip side of that coin. More people are commuting again, but many who have a public transit option are still using their cars instead. And, of course, Russia’s invasion of Ukraine has disrupted the supply of oil—in a big way. With demand rising and supply constrained, prices are spiking. Last week, the average cost of gas in the U.S. clocked in at a record $4.43 per gallon, and in California, where gas taxes are particularly high, a gallon of gas is over $6.

High gas prices raise the risk of a recession; when you pay more at the pump, you have less to spend elsewhere. But it’s not a given. And while gas prices may continue to rise from here (you can’t just flip a switch to produce more oil and gas), the cure for high gas prices is…high gas prices. Should commuters begin to again see the benefits of either working from home or riding buses and trains, demand could quickly decline, once again proving the point my economics teachers made so many years ago.

Note: Chart shows average cost per gallon of gas in the U.S. on a quarterly basis from 12/31/93 through 3/7/22.
Source: U.S. Energy Information Administration.

Podcast: 5 Excellent Questions for Your Accountant

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Finding an expert who communicates well and has the experience to address your unique needs can make all the difference when it comes to settling up with Uncle Sam. Listen now to learn more!

Adviser Investments’ Today’s Market Takeaways

There’s no shortage of hyperbolic headlines and provocative punditry in the financial media. But you won’t find such hysterics here. In Today’s Market Takeaways, members of our investment team provide timely videos that clearly and concisely explain what we’re seeing in the markets.

In our latest Market Takeaways, Vice President Steve Johnson spoke about when boring is beautiful, while Senior Research Analyst Liz Laprade revealed the ins and outs of Amazon’s stock split.

We hope you find these episodes engaging and accessible. If there are any topics you’d like us to address, please send an email to info@adviserinvestments.com!

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