Investing in Chinese stocks amid geopolitical tensions

A woman adjusted a Chinese flag near the American flag.

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SINGAPORE – Investors need to over-allocate their portfolios in China, as “geopolitical diversification” will be more important in the coming years, according to an investment strategist.

Currently, investors globally have less than about 5% of their shares invested in China, said Paul Colwell, head of advisory portfolio group for Asia at insurance brokerage Willis Towers Watson.

Pension funds and endowments in China are between 3 and 5%, according to a Willis Towers Watson report, citing a recent survey by data analytics firm Greenwich Associates.

According to the index provider, the weightage of Chinese A-shares – or shares traded on the mainland, is 5.1% of the MSCI Emerging Markets Index as of August 2020.

“We just don’t think that’s enough to be fully prepared for the new world order,” Colwell told CNBC’s “Squawk Box Asia” on Monday. He said that he should increase the allocation to Chinese stocks by 20% in the next decade.

“In the new world order, for investors to properly place their portfolios for the post-Kovid world, they have a greater need to allocate their investment portfolios to China,” Colwell said. “Geo political diversification is going to be a much more important portfolio… in the coming years.”

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

Since 2018, Beijing has been in a trade dispute with the US, culminating in a “phase one” trade agreement earlier this year. Still, tensions continued to grow and the tech space grew, as Washington targeted Chinese technology giants from phone maker Huawei to video-sharing app Tiktok.

Tensions between China and Australia have also intensified in recent months. Canberra called for a global investigation into the origin of coronovirus.

The move angered Beijing, which banned trade on Australian imports – the latest, an anti-dumping duty of up to 212% on Australian bottled wine imports, which China announced late Friday.

Regarding the trade stress, Colwell told CNBC that they would be “very noisy” and create short-term market volatility.

However, he said: “If you believe that the world is moving away from globalization, if you believe that the world’s major economies, especially the US and China will be separated from each other, then we believe that There is a strong case for allocation China and more than you would have expected otherwise. ”

Colwell stated, “China A-share market is relatively less co-related with developed markets. Chinese economy monetary policy operates at a fundamentally different frequency than other major geographies driven by different approaches to economic policy. “

He added that the allocation in Chinese shares would increase the “flexibility, strength” of the global portfolio.

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