Dec. 2019 – China Chatter

It’s hard to avoid news about China these days. Headlines appear almost every day involving trade and investing, military expansion, political repression, the environment, even professional sports. But investors should put these developments in perspective.

Though China is still a developing nation, its economy (GDP)is the now second only to the U.S. It boasts a large and growing manufacturing sector in particular. State ownership, heavy regulation and mercantilist trade policy predominate, but over the past four decades Chinese leaders have embraced many of the features of the free market. Growth has leapt in response. Chinese consumers are reaping the benefits as a booming middle class has emerged.

Many Chinese businesses have access to global capital markets,so U.S. investors can take a stake in Chinese equities. Chinese stocks trade in local exchanges, in Hong Kong, and even in the U.S. through ADRs. Foreign investors have only limited access to local exchanges (through A shares), but many companies are available (through H shares) on the Hong Kong exchange.

With a population of well over one billion and vast natural resources China has enormous potential to grow, to the benefit of the entire world. But investment risk is high. Until personal freedoms, including property rights, are secure, China will remain a wild card.

Amidst the media hype, we caution investors to give China only the attention it deserves. Notably, while the Chinese economy accounts for over 16 percent of global economic output, Chinese firms account for less than three percent of the world’s total equity market value.1 Our sample moderate portfolio proposes a 6 percent allocation to emerging markets stocks. As China represents 34 percent of the emerging markets index, the sample moderate portfolio has only about a 2 percent allocation to Chinese stocks (0.34 multiplied by 0.06). The index is also broadly diversified across many Chinese companies.

Those who choose to include China in a globally diversified portfolio are best served by purchasing emerging market index-type funds such as those listed on page 96, in accordance with their circumstances and preferences.

Also in This Issue:

2019 Capital Markets: Firing on All Cylinders
What to Expect When You’re Investing
Social Security: Turning the Tables on Scammers
Mutual Fund Distributions
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Recommended Investment Vehicles