Will China stocks stop performing poorly?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
FlyingMoose
Posts: 571
Joined: Wed Mar 04, 2009 10:48 pm

Will China stocks stop performing poorly?

Post by FlyingMoose »

Since I use something similar to the Pinwheel Portfolio, I have 10% in Emerging Markets (VEMAX). This index is currently more than 1/3 invested in China.

I am considering switching this to Emerging-ex-China (EMXC or XCEM) for the following reasons:

1. Despite going from single digits to more than 1/3 of the Emerging Markets index, it doesn't seem to have helped the fund much.

2. Some have argued that China shouldn't be considered an Emerging Market any more. It would be a much smaller percentage if it was the Developed Markets index.

3. All else being equal, I would prefer not to invest in China for ESG (Environmental, Social, and Governance) reasons.

China has had double-digit GDP growth for many years, but this doesn't seem to have been reflected in returns to investors (see graph below). Other timeframes show slightly better or worse results, but with the growth story of China, I would have expected it to outperform even the US, which it has not.

Is there any reason to think this will change in the future?

Image
visualguy
Posts: 2315
Joined: Thu Jan 30, 2014 1:32 am

Re: Will China stocks stop performing poorly?

Post by visualguy »

What percentage of your stock portfolio is in Chinese stocks? If it's just 3-4%, then not sure you should be that worried about it.
User avatar
whodidntante
Posts: 10259
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Will China stocks stop performing poorly?

Post by whodidntante »

China is absolutely an emerging market. It is possible that it always will be.
https://en.wikipedia.org/wiki/Emerging_market
User avatar
CyberBob
Posts: 3368
Joined: Tue Feb 20, 2007 2:53 pm

Re: Will China stocks stop performing poorly?

Post by CyberBob »

“ The reason to avoid China's equity markets can be summarized in one word: dilution.

The best estimates are that the Chinese equity markets dilute their share pools on the order of about 20% per year, so even if the country is growing its GDP and corporate profits at slightly less than 10% pa, they can't keep up on a per-share basis.

This is borne out by the MSCI China index, which since 12/31/92 has had a total return of 1.6% in nominal dollar terms, or less than zero in real terms.

The problem, of course, is that if you're indexing Emerging Markets, there's no way to avoid the country's ~30% weighting in most indexes. ”

— Bill Bernstein

viewtopic.php?p=5261908#p5261908
User avatar
burritoLover
Posts: 1171
Joined: Sun Jul 05, 2020 12:13 pm

Re: Will China stocks stop performing poorly?

Post by burritoLover »

FlyingMoose wrote: Tue Nov 23, 2021 11:17 pm Since I use something similar to the Pinwheel Portfolio, I have 10% in Emerging Markets (VEMAX). This index is currently more than 1/3 invested in China.

I am considering switching this to Emerging-ex-China (EMXC or XCEM) for the following reasons:

1. Despite going from single digits to more than 1/3 of the Emerging Markets index, it doesn't seem to have helped the fund much.

2. Some have argued that China shouldn't be considered an Emerging Market any more. It would be a much smaller percentage if it was the Developed Markets index.

3. All else being equal, I would prefer not to invest in China for ESG (Environmental, Social, and Governance) reasons.

China has had double-digit GDP growth for many years, but this doesn't seem to have been reflected in returns to investors (see graph below). Other timeframes show slightly better or worse results, but with the growth story of China, I would have expected it to outperform even the US, which it has not.

Is there any reason to think this will change in the future?

Image
You are trying to micromanage 3.3% of your portfolio. An asset with very low valuations. There are scenarios where the Chinese market could explode in the long term - not sure why you would want to miss that. It could also do poorly forever - that’s a risk, but China represents less a percentage in your portfolio than Amazon does in an investor’s S&P 500 portfolio. Think about that for a second - most here would say an all-in S&P 500 bet is A-OK, if not preferred and you are investing in an entire country’s stock market with a GDP 2nd in the world at a weighting less than the 3rd largest single stock in the S&P 500 index.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
User avatar
nisiprius
Advisory Board
Posts: 45129
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Will China stocks stop performing poorly?

Post by nisiprius »

Have they been "performing poorly?" I don't track it. I haven't bothered to look before.

Source

Image

I'm not seeing it. What I'm seeing is
  • three funds that have all underperformed the global market (yellow)
  • China (blue) doing about the same as Total International (aqua);
  • Emerging markets (red) underperforming China.
What are you referring, that last bit at the end? Less than a year?

Recency.

A year of underperformance in a few percent of your portfolio.
Last edited by nisiprius on Wed Nov 24, 2021 3:58 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
UpperNwGuy
Posts: 6642
Joined: Sun Oct 08, 2017 7:16 pm

Re: Will China stocks stop performing poorly?

Post by UpperNwGuy »

FlyingMoose wrote: Tue Nov 23, 2021 11:17 pm I am considering switching this to Emerging-ex-China (EMXC or XCEM) for the following reasons:

1. Despite going from single digits to more than 1/3 of the Emerging Markets index, it doesn't seem to have helped the fund much.

2. Some have argued that China shouldn't be considered an Emerging Market any more. It would be a much smaller percentage if it was the Developed Markets index.

3. All else being equal, I would prefer not to invest in China for ESG (Environmental, Social, and Governance) reasons.
If you believe in reason #3, then reasons #1 and #2 shouldn't matter to you.
Triple digit golfer
Posts: 8673
Joined: Mon May 18, 2009 5:57 pm

Re: Will China stocks stop performing poorly?

Post by Triple digit golfer »

Seems like you've convinced yourself and are looking for confirmation.

China represents 3-4% of your stock portfolio. As the burrito person said, this is less than Amazon and a few other stocks each represent in an S&P 500 index.

One benefit of a diversified portfolio is that you don't have to worry or care about things like this.
User avatar
asset_chaos
Posts: 2072
Joined: Tue Feb 27, 2007 6:13 pm
Location: Melbourne

Re: Will China stocks stop performing poorly?

Post by asset_chaos »

One of the drawbacks of a portfolio of many pieces is being forced to view the unceasing return differentials of the many pieces, which in turn causes the mind to wonder why and brings about such questions as the OP's which, to my mind, do little other than sap mental energy into unproductive channels. Not having this kind of distraction is one of the reasons I prefer total world stock index fund.
Regards, | | Guy
nalor511
Posts: 2206
Joined: Mon Jul 27, 2015 1:00 am

Re: Will China stocks stop performing poorly?

Post by nalor511 »

asset_chaos wrote: Wed Nov 24, 2021 3:34 pm One of the drawbacks of a portfolio of many pieces is being forced to view the unceasing return differentials of the many pieces, which in turn causes the mind to wonder why and brings about such questions as the OP's which, to my mind, do little other than sap mental energy into unproductive channels. Not having this kind of distraction is one of the reasons I prefer total world stock index fund.
I can't give up the FTC
quantAndHold
Posts: 6600
Joined: Thu Sep 17, 2015 10:39 pm

Re: Will China stocks stop performing poorly?

Post by quantAndHold »

China has a massive problem with dilution, so the stock market will probably always underperform their GDP growth. The stock market is basically disconnected from the economy of the country because the rich and powerful are raking the profits off the top.

That said, China isn’t really much different than any other emerging market. All of them are immature markets with governance and reporting problems, so investing is pretty much gambling. That’s part of the criteria that makes them “emerging.”

So the question is probably not whether or not you want to invest 3.3% of your portfolio in China (who cares, it’s 3.3%), but if you really want to invest 10% of your portfolio in emerging markets.
Yes, I’m really that pedantic.
ebeb
Posts: 124
Joined: Sat Dec 23, 2017 2:18 pm

Re: Will China stocks stop performing poorly?

Post by ebeb »

I always wonder why International funds are needed since all modern US companies have so much international exposure/connections and supply chains that a regular VTI/BND portfolio would have enough international correlation especially with thousands of US companies such as microsoft, amazon, tesla, apple etc. with lot of revenue/profits from abroad would provide automatic international exposure. Basically replace 3-fund with 2-fund portfolio.
63% VOO | 34% BND | 3% CASH
GoldenGoose
Posts: 341
Joined: Tue Jan 30, 2018 2:08 pm

Re: Will China stocks stop performing poorly?

Post by GoldenGoose »

3% of 1 million is still 30k. Losing 30k still hurts.
Triple digit golfer
Posts: 8673
Joined: Mon May 18, 2009 5:57 pm

Re: Will China stocks stop performing poorly?

Post by Triple digit golfer »

GoldenGoose wrote: Thu Nov 25, 2021 9:30 am 3% of 1 million is still 30k. Losing 30k still hurts.
Do you use a U.S. total market index or S&P 500 fund? The top handful of companies are more than 3% each.
User avatar
3CT_Paddler
Posts: 3372
Joined: Wed Feb 04, 2009 5:28 pm
Location: Marietta, GA

Re: Will China stocks stop performing poorly?

Post by 3CT_Paddler »

A large portion of Chinese companies are state owned. Chinese leadership has just outlawed private tutoring companies that had grown to a decent segment of the economy. They have jailed some of the most successful businesses owners in the last two years, including its most famous Jack Ma without charges.

To add insult to injury, you don’t really own shares in Chinese companies or have any real shareholder rights. Tomorrow Chinese leadership could determine we don’t want foreign investment and take your investment capital without recourse.

Maybe the market has a crystal ball and knows what the future holds or maybe it doesn’t.
Topic Author
FlyingMoose
Posts: 571
Joined: Wed Mar 04, 2009 10:48 pm

Re: Will China stocks stop performing poorly?

Post by FlyingMoose »

I have read the other thread linked above, very interesting.

I also wonder whether I should count Hong Kong as part of China.
Post Reply