Investors Shift Focus as China Slows: Franklin Templeton

Global emerging markets are seeing a dramatic shift in investment flows, as institutions and retail investors alike adjust their allocations away from China and toward markets like India and Japan, according to a recent Franklin Templeton report.

In an interview Monday, Dina Ting, Franklin Templeton’s head of global index portfolio management, said that when investors allocate their assets, "they are looking for areas where they believe there's better opportunity.”

The shift in global investment patterns is detailed in “The 2025 ex-US investment opportunity set,” authored by Ting and Marcus Weyerer, director of ETF investment strategy EMEA at Franklin Templeton ETFs.

India has positioned itself as a compelling destination for capital flows, driven by its young demographics, infrastructure development and potential as a new manufacturing hub, according to the report.

The reallocation trend emerges as China faces economic challenges, with the report showing GDP growth moderating after decades of rapid expansion. While China’s economy grew 5.2% in 2023 after abandoning its zero-COVID policy, the report cites International Monetary Fund projections showing growth slowing to 4.5% by 2025.

Japan’s market has attracted investors through increasing shareholder-friendly reforms, with Ting noting that companies are boosting dividends and share buybacks. Additionally, the report highlighted Japan’s growing role in the semiconductor supply chain amid the artificial intelligence boom.

Emerging Markets' Evolution Drives Opportunities

Franklin Templeton's FTSE Japan ETF (FLJP) is up 5.9% year to date, Ting said. While Japan's local market has performed well, currency impacts have led investors to consider hedged options, she added, highlighting how the firm's currency-hedged Franklin FTSE Japan Hedged ETF (FLJH) has delivered stronger returns. 

The transition in market preferences has benefited Taiwan, with the report showing its stock market returned nearly 15% in U.S. dollar terms through the end of November in 2024, outperforming the broader MSCI Emerging Markets Index’s 7.7% return.

The semiconductor industry remains a key driver for Taiwan’s market, with the report highlighting expectations of continued growth in global chip sales powered by AI and 3D technology.

The report concludes that while U.S. allocations remain cornerstone investments, the broadening global rally and shifting geopolitical landscape make international diversification increasingly important for investors’ portfolios.