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Overweight China and Emerging Markets

Hello everyone,

I was watching a YouTube video today of Ray Dalio expressing his opinions on China, its emergence and potential as an investment. The video is here, in case you're interested: https://www.bridgewater.com/china/

 

Long story short, he believes investing in China is a good strategy from a diversification point of view given its emergence and ongoing "conflict" with the US for the world's dominant economic power. Given the two countries will compete economically over the next years/decades and one is likely to emerge on top, betting on both would be wise. Therefore, he argue investors should drop their bias towards the US and allocate some capital to China, a suggestion which has taken some flak given China doesn't exactly befriend western values of democracy and freedom.

 

However, his reasoning does make sense to me from a diversification point of view. Today, Emerging Markets account for ~11% of the MSCI all country index, even though their share in world GDP is closer to a third.

 

Therefore, I'd like to ask you your opinion on portfolio allocations to Emerging Markets, in general, and China, in particular. Should they be overweighted relative to their market cap weight and closer to their world GDP weight? What's your personnal stance on EM/China investing?

 

Thank you in advance.

 

 

A follow up question to FMTG's post. I am sure Buffet is aware of all of this, having invested in PetroChina in the past. Is BRK exposed to China gains in anyway?

@mftg,

I am personally a big fan of global investing. Home bias can be incredibly devastating. Just look at Argentina's 45% stock market collapse YESTERDAY. People say this can't happen in the USA, but you never really know. I am sure people in the UK thought that their big market share in the 1800s would never collapse. But it did.

As a baseline, I am a big fan of starting with the Global Financial Asset Portfolio. This is the one true benchmark for all investors as it represents "the market" in a market cap weighted sense.

IMO, there are many good reasons for foreign investing:

1) Currency diversification

2) Corporate diversification

3) Globalization trends

@hugo,

Yes, Buffett has quite a lot of international diversification. It's been a major goal of his in the last 10 years.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Cullen,

Using the market weighted GFAP as a starting portfolio, won't we always be biasing our portfolio towards countries with developed financial markets and underweighting emerging countries which may compete with the US further down the road and already have very large economies but have lower market cap weights today given the lower development of their markets?

Additionally, would you then think it may make sense to follow Dalio's recommendation and overweight EMs (China in particular) relative to their current weight in the world's market cap?

Thank you.

Hi MFTG,

It's just a starting point. I always tell people that the GFAP is the only logical benchmark since it is the true "market" portfolio. But it's also smart to deviate from this portfolio for various reasons. Maybe emerging market is too risky for you? Maybe domestic is not risky enough? Maybe there are tax reasons to deviate? Maybe foreign bonds are inappropriate? There are lots of reasons not to hold "the market portfolio". Everyone is different and these portfolios need to be customized. The idea of a true "passive" portfolio is mostly nonsense.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche