Breaking News
Investing Pro 0
Black Friday SALE: Up to 54% OFF InvestingPro+ CLAIM OFFER

Chinese Stocks: Why And How To Include Them In Your Long-Term Portfolio

ph.investing.com/analysis/chinese-stocks-why-and-how-to-include-them-in-your-longterm-portfolio-130210
Chinese Stocks: Why And How To Include Them In Your Long-Term Portfolio
By Francesco Casarella/Investing.com   |  Sep 20, 2022 22:50
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
FXI
-1.71%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
MCHI
-1.82%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
SSEC
+0.40%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
XCX6
-0.88%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
CSI300
+0.50%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
CIFc1
-0.46%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • The opening of Chinese markets to foreign investors will likely result in larger capital inflows
  • China currently accounts for 19% of the global GDP, but only 13% of equity capitalization
  • From a strictly economic standpoint, adding Chinese stocks to your portfolio is an important part of a long-term diversification strategy

There are several reasons why you should consider adding Chinese equities to your long-term portfolio. Of course—and let's make that clear right away—with the appropriate weight. Global and U.S. equities should still account for the most significant allocations.

After hitting all-time highs in 2015 at almost 5500 points, the Shanghai Composite Index has been moving sideways within a channel, ranging from 2670 to 3660 (see image below).

Shanghai Composite Weekly Chart
Shanghai Composite Weekly Chart

This long "indecision" is bound to break out to the upside for several reasons. First and foremost, with the opening of Chinese markets to foreign investors, new flows are expected between now and the next few years.

Second, it is very likely that China will overtake the United States as the world's largest GDP in the coming years, and we must take that into account. Comparing GDP and market capitalization, we note that China weighs in at 19% of the world's GDP but only 13% of equity capitalization. So adjusting the two values (more likely to align capitalization upward) would lead to a 50% growth in Chinese equity values.

Global GDP/Market Cap
Global GDP/Market Cap
Source: Eaton Vance

But let's also talk about energy transition and raw materials. Guess who has (almost) absolute dominance on rare-earth elements, which are an essential part of many high-tech devices and other industrial applications? China with 60% (see below).

Production, Processing Of Clean Energy Materials
Production, Processing Of Clean Energy Materials

Source: Financial Times

And it doesn't end there; for the other metals, which are fundamental in various industries, China handles the final processing stages for almost all of them. In short, since there is so much talk today about the energy problem, we need to understand who is in the dominant position on the issue.

And lastly, U.S. dependence. Not only has China been unloading U.S. debt recently, as a new economic and political bloc with Russia and India is now evident, but if we look at the list of countries least sensitive to U.S. rate hikes, here we find China among those best-placed.

Vulnerability Index
Vulnerability Index

Source: Pictet Asset Management

So political discussions apart, from a strictly economic standpoint, I believe that China should weigh anywhere between 5 and 15 percent in an investor's long-term portfolio, depending on your personal preference—preferably at an open exchange rate for currency diversification.

Here are three of my favorite ETFs for betting on the Chinese market. 

  • iShares MSCI China ETF (NASDAQ:MCHI), which provides exposure to the locally listed portion of the Chinese stock market in the local currency. 
  • iShares China Large-Cap ETF (NYSE:FXI), which tracks the performance of the 50 largest Chinese stocks that trade on the Hong Kong Stock Exchange.
  • Xtrackers MSCI China UCITS ETF (LON:XCX6), which tracks large and mid-cap Chinese companies across various types of listings. 

Disclosure: Francesco Casarella is long on the Xtrackers MSCI China UCITS ETF. 

Chinese Stocks: Why And How To Include Them In Your Long-Term Portfolio
 

Related Articles

Chinese Stocks: Why And How To Include Them In Your Long-Term Portfolio

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email