Investing in Chinese stocks amid geopolitical tensions

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A woman adjusts a Chinese flag near the American flags.
Ng Han Guan | AFP | Getty Images
SINGAPORE – Investors should allocate more of their portfolios to China, as “geopolitical diversification” will be a more crucial consideration in the years to come, according to an investment strategist.
Currently, investors around the world have about less than 5% of their stocks invested in China, said Paul Colwell, head of the portfolio advisory group for Asia at insurance broker Willis Towers Watson.

Pension funds and endowments have between 3% and 5% of allocations to China, according to a report by Willis Towers Watson, which cites a recent survey by data analytics firm Greenwich Associates.

The weight of Chinese A shares – or stocks traded on the mainland – is 5.1% of the MSCI Emerging Markets index as of August 2020, according to the index provider.

“We just don’t think it’s enough to be fully prepared for the New World Order,” Colwell told CNBC’s “Squawk Box Asia” Monday. They are expected to increase their allocation to Chinese equities by up to 20% over the next decade, he added.

“In order for investors to properly position their portfolios for the coming post-Covid world, in the New World Order, they need to have more of their investment portfolios allocated to China,” Colwell said. “Geopolitical diversification will be a much larger portfolio… to consider in the years to come. ”

If you think the world is moving away from globalization, if you think the world’s major economies, especially the United States and China, will disassociate themselves, then we think there is a strong case for ‘an allowance in China.

Paul Colwell

Head of Portfolio Advisory Group for Asia, Willis Towers Watson

China has been embroiled in trade disputes this year with the United States, Europe, Australia and India.

Since 2018, Beijing has been in a trade dispute with the United States that resulted in a “phase one” trade deal earlier this year. Nonetheless, tensions continued to escalate and shift into the tech space, as Washington increasingly targeted Chinese tech giants – from phone maker Huawei to video-sharing app TikTok.

Tensions between China and Australia have also intensified in recent months. It came after Canberra called for a global investigation into the origins of the coronavirus.

The move angered Beijing, which has imposed trade restrictions on Australian imports – the latest being anti-dumping duties of up to 212% on imports of Australian bottled wines, which China announced on Friday evening.

Regarding trade tensions, Colwell told CNBC they would only create “a lot of noise” and short-term market volatility.

However, he said, “If you think the world is moving away from globalization, if you think the world’s major economies, especially the United States and China, are going to decouple, then we think it is. there is a strong case for an allocation to China and more than you might otherwise expect. ”

“The Chinese A-share market is relatively weakly linked to developed markets. The Chinese economy operates at a fundamentally different frequency than other major geographies, driven by a different approach to monetary policy and economic policy, ”Colwell added.

Being attributed to Chinese equities will therefore enhance the “resilience, robustness” of global portfolios, he said.

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