Practical Applications of Should You Have More China in Your Portfolio? Putting Common Arguments for Increased China Exposure to the Test

2022 
In Should You Have More China in Your Portfolio? Putting Common Arguments for Increased China Exposure to the Test, from the Winter 2020 issue of The Journal of Index Investing, authors Jason Hsu, Xiang Liu, and Phillip Wool of Rayliant Global Advisors review the most common arguments for increasing allocation to Chinese onshore and offshore equities within portfolios. The key bases for such arguments include China’s total GDP, the rapid rate of GDP growth, eventual further index inclusion, low correlation with other market equities, equity risk premiums, and greater alpha opportunity. Through close empirical analyses, the authors determine that greater allocation to Chinese equities may be a sound investment decision, though it was supported by only some of the considerations. Specifically, the authors reject the hypothesis that China’s large total GDP, GDP growth, and equity market capitalization indicate an opportunity for increased portfolio returns. However, China’s low correlation with other market equities, higher opportunity for alpha, and faster earnings growth did support the argument for greater allocation to Chinese equities.
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