Posted On: 7/13/2015 11:35 AM
I think it is common knowledge that there are over 1 billion people living in China who are now becoming the largest consumer population in the world. And, when you consider all of the Asian markets, it is staggering compared to the U.S. However, China’s history for capitalism is short and there are going to be tremendous growing pains. In the U.S. markets, we are accustomed to volatility where the markets can move rapidly up and down and over the years our markets have suffered through many “bubbles” and crises. Today, China and the entire Asian region is no exception.
China’s Introduction to Capitalism is Less Than 43 Years Old.
President Nixon in 1972 visited China with an agenda of normalizing relations. He wanted China to become a trading partner, not only with the U.S., but also with other regions. Forty-three years later the Chinese economy is growing faster than most other countries around the world.
Facts You Should Know as an Investor in Asian Mutual Funds.
The Chinese are primarily savers, but the government is encouraging the population to become investors. Last year, approximately 20 million new investors were added to the growing middle class. However, the Chinese market is tiny in comparison to the U.S. There are two stock markets in China; the Shanghai and the Shenzhen. Both exchanges only have approximately 2800 listed stocks. And there are two different classes of shares: A Shares and B Shares. Without getting too complicated at one time only A shares were available to the Chinese investor and B shares were for foreign investors. Now both are available to the Chinese and on a limited basis foreign investors can purchase A and B shares. Most Asian mutual funds invest through Hong Kong and they can invest in H shares as well. Currently, approximately 80% of China’s market is owned by individual Chinese and only 20% by institutions. If you are not overwhelmed at this point, you should be. Why is all of this so important? The main reason is the less that your mutual fund has invested in A or B shares, the less direct exposure you may have to China.
The Bottom Line: Should I Be Selling Mutual Funds or Buying More of an Asian Mutual Fund?
Selling mutual funds in a crisis is usually a bad financial decision because it is based upon emotion, not facts. First, did you purchase the fund without doing your research? All Asian funds are not created equally because the fund may have more or less exposure and risk to China than you are comfortable with as an investor. Financial advisors look at the regions the fund is investing in and then, also critical, is how much of the fund’s assets are in each region. Next, what are the top holdings of the fund and what percentage is in each stock? Do you know the sector allocation? Is it in financials, health care, or consumer products and services? Lastly, what is the experience of the manager of the fund and for how long? And, are you a long time investor? Answering these questions and knowing your investment risk tolerance should make the decision easier.
I am personally an advocate of investing in emerging markets, especially in the growing Chinese one. Over the next decade, the growth in China will be enormous and the Asian countries that import and export goods to it will, I think, continue to benefit.
I visited China in 1995 and saw the massive growth that was happening. I recall traveling from the Beijing airport to my hotel in Beijing and was extremely nervous as we went over a bridge that had only taken one year to build. Later on in my trip, I had the privilege to visit the Chinese Wall. It is magnificent and grand and I felt foolish as I realized that a culture, which could build that structure, certainly could build a bridge.
For specific advice on how the recent events in China's stock market impacts your portfolio, let's talk.
