Published Wednesday, February 12, 2020 at: 7:00 AM EST
The coronavirus has focused renewed attention to the risk of investing in China, but China may pose a hidden risk to retirement investors holding emerging markets funds.
More than a third of emerging markets funds typically are comprised of Chinese stocks. For example, 35% of the holdings of the MSCI Emerging Markets Index, the widely used index against which emerging markets investments are benchmarked, are in Chinese stocks. Many 401(k) investors may be unaware that a third of their emerging markets investments are invested in China.
The longer-term risk posed by investing in China is reflected in this chart of the Standard & Poor's 500 performance versus an index representing emerging markets. Since Chinese stocks commonly dominate holdings of emerging markets investments, Chinese stock market returns have dominated the performance of emerging markets investments.
Although financial news headlines have focused on the risk to the Chinese economy posed by coronavirus, the outbreak is actually likely to be only a temporary negative. However, the longer-term risk of owning Chinese stocks is illustrated in the relatively poor performance of emerging markets versus U.S. stocks.
Since the China economic boom from 2003 to 2007, the MSCI Emerging Markets Index has gone sideways for 12 years. Meanwhile, U.S. stocks soared, more than doubling, in the longest bull market in modern U.S. history.
To be clear, since 2007, when the rate of growth of China's gross domestic product peaked at about 18%, the MSCI Emerging Markets index has not shown a net gain. That's for 12 years! That's the hidden risk of Chinese stocks.
If you have questions about emerging markets, investing in China, or about asset allocation of your portfolio, please contact our office.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market-value weighted index with each stock's weight proportionate to its market value. Index returns do not include fees or expenses. Investing involves risk, including the loss of principal. Past performance is no guarantee of future results. Return and principal value of an investment will fluctuate, and when redeemed, may be worth more or less than their original cost. Performance statistics quoted here may be lower or higher now.
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