28 05/21 28/05/2021

Geographical Allocation

Allocation is crucial in investing. It is described as an amount or portion of a resource assigned to a particular recipient. One can allocate based on type of security (asset), market value size, credit rating, and geography. These may be for mere diversification purposes or to try to capture growth. China has been coming up a lot lately as one of the best geographical allocations to capture growth. China went from a closed communist economy to become the 2nd largest economy of the world after the U.S. Some argue that China is on its way to surpass the U.S. to become the largest economy of the world. If this happens there is indeed more room for growth.

How does this economic growth effect the Chinese stock market? The Chinese stock market rose at breakneck speed during the last decade. The market is known for its sustained growth, its massive scaling, high valuations, and extremely accommodative lending. There are risks to these. In addition to these, Chinese public equity is not really public and equitable seeing that their equities have an average of 45% float (stocks actually available to public investors). This brings about valuation and transparency risk. Safer bets on the continent are best done by owning trustworthy holding companies/ conglomerates with operations in China and/ or through reliable China-focused funds.

*See the chart for the MSCI China Index 10 year movement

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