Weekly spotlight: Will the Year of the Ox bring prosperity to China and overseas markets?

Last week, many across the world celebrated the advent of a new Chinese year: the Year of the Ox.

Although celebrations in China took place under the shadow of coronavirus, with many provinces offering incentives to those who stayed at home to celebrate the new Chinese year, also referred to as the Lunar New Year, even the limited festivities highlighted the gap between British lockdown and more normal life in China, where the virus has been more successfully contained.

Industries and economies China and other so-called ‘emerging markets’ have been able to recover and restart, in contrast to those closer to home which are still mired in virus restrictions.

Investments in these countries have recovered too, with China’s Hang Seng index now at over 30,000, compared with under 22,000 last March. The election of Joe Biden as US President has further boosted China’s prospects, since although it is unlikely to bring a total end to trade tensions between the two nations, day-to-day interactions are likely to be more considered and predictable than under Trump.

 

The need for diversity

For individual investors, taking a chance on emerging markets can feel very risky indeed. We all suffer from what is known as ‘home bias’, meaning that we are more likely to buy investments that are closer to home, although more recent figures suggest that this bias has receded somewhat in recent years.1

But having your investment eggs in only one basket- even if it is the one you know best - can result in a bumpy ride for your portfolio, and you could miss out on strong performance elsewhere in the world.

Emerging markets, in particular, can be risky and unless you are an expert yourself it can be hard to know exactly what you are investing in.

But the rewards can be great too. Forecasts from the International Monetary Fund (IMF)currently suggest that China’s economy could grow by 8.3 per cent in 2021, while the UK figure is at 4.5 per cent. Emerging and Developing Asia as a whole is forecast to grow by 8.3 per cent, compared with 4.3 per cent for what the IMF calls ‘advanced economies’.2

While some of the faster growth will be down to response to coronavirus, in the long term countries like China have a young population and a burgeoning middle class, factors that could help drive further expansion.

 

Getting global investing right

While a diversified global portfolio is a good way to ensure your investments are as safe as possible and primed to grow, investing grows more complex when you look overseas and consider how much of your portfolio should be invested in each geographical area.

When you start looking at emerging markets, there are many different economies to consider. The term covers everywhere from Brazil and Mexico to China and Korea, and there are a multitude of different funds focussing on different global areas, industrial sectors or investment themes.

As well as asset allocation, you will need to consider the impact of currency fluctuations, which can wipe out investment gains you make in your own currency, and increase the risk that you take on. In some cases, you may have global exposure without even knowing it, as many UK-domiciled businesses have huge global operations.

The right global portfolio for you will be different to everyone else’s, as risk appetite and personal circumstances vary hugely.

 

If you are unsure of how to get this right, a financial adviser should be able to help you to create a balanced suite of investments to get you through the Year of the Ox and beyond.