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| Pathways Advisory Group. Inc. Michelle Carter, CFP® |
Client meetings are a great time to discuss timely headlines and the impact on your Portfolio. During the month of January, I noticed a theme…
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| What is up with China??? |
Or, put another way…
What is going on with Chinese stocks and how do they affect my Portfolio?
The information available about the current economic climate in China and its effect on the global economy could fill 100 blog posts. I thought it may be best to narrow it down to the 3 most common questions in my office on this topic.
Q: Do I own Chinese stocks in my Portfolio?
A: Yes, with a caveat. Most of our clients hold DFA (Dimensional Fund Advisors) emerging markets funds. Chinese companies trading outside mainland China (i.e., on the Hong Kong stock exchange) are eligible for Dimensional’s emerging market’s trading strategies. Dimensional has not approved mainland China markets, mostly due to their restrictions… local Chinese investors do not have full access to outside capital markets, which restricts their ability to participate in global trading. This inhibits outside investors’ ability to properly assess the prospects and risks of their market. Many Chinese companies are listed on both the mainland China and the Hong Kong exchanges.
Q: I saw China-related headlines daily. So, how badly did China’s stocks actually decline in January 2016?
A: I included this question because the answer is quite interesting… For simplification purposes, we can look at this in 3 categories… “Mainland China” (represented by the MSCI China A Index), the “China component of the MSCI Emerging Market Index” (represented by the Hong Kong exchange and other overseas listings) and the MCSI Emerging Market Index (return of all emerging markets within that index). While “mainland China” declined 24.86%, the “China component of the MSCI Emerging Market Index” declined about half that amount, at 12.72%. Looking at the MCSI Emerging Market Index as a whole, the January decline was 6.49%. Knowing these numbers help to put the decline in perspective, and show how the January decline might affect the emerging markets area of your Portfolio.
Q: I’ve heard a lot about the Yuan. How does Chinese currency play a factor in my Portfolio?
A: By not investing directly in the Chinese market, Dimensional emerging markets strategies do not have direct exposure to Chinese currency. This, along with the fact that currency flow restrictions have not been directed at investors holding shares on the Hong Kong exchange or outside Chinese listings, has minimized the impact.
China seemed to be the hot topic in January, a bit of déjà vu from the fall of last year. So far, February’s headlines have been dominated by fluctuations in oil prices and the Federal Reserve. I look forward to our continued discussions on these and other timely issues. Thankfully, our investment philosophy remains constant through whatever current storms pass over us.
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