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How Much to Allocate to Asia and China in a Global Portfolio?

Updated: Sep 9, 2021

Executive Summary

Over the last years, Asia and China have emerged as economic powerhouses. However, most investor portfolios do not reflect this new economic reality. Asian and Chinese stocks are typically under-represented in most investor portfolios as well as in global indices. Consequently, investors miss out on potential investment opportunities and portfolio diversification.

There are many strategies to determine how much to allocate to Asia and China in an investment portfolio. While each approach has its merits and limitations, a straightforward weighting based on GDP, GDP growth and market capitalization can provide meaningful reference points in determining the optimal allocation. Considering these metrics, an Asia allocation of 30-46% and a China allocation of 17-25% seems appropriate.

Asia and China Share of GDP of 37% and 17% respectively

One commonly used approach in determining asset allocation is based on a country’s contribution to global GDP. This is a proxy for a region’s relative economic strength. According to the IMF, in 2020, Asia dominated with a 37.4% share and China garnered an 17.4% share of global GDP. Using share of GDP is a useful benchmark for allocation, but only provides a snapshot of current economic performance. It doesn’t consider the future growth or decline of a region which is critical for a prescient investor.

Asia and China Share of GDP Growth of 46% and 25%

Share of global GDP growth is in many cases a better metric. This enables an investor to be better positioned for future growth. According to the IMF, Asia will contribute nearly half (45.9%) and China nearly a quarter (24.9%) of the world’s total increase in GDP from 2020 through 2026. These forecasts illustrate the outsized role of Asia and China in driving the overall global economy. It also underscores the importance of investing in that region in order to capture future growth opportunities.

Asia and China Market Capitalization of 30% and 17%

Another metric often looked at to determine allocation is based on the size of the capital markets. Market capitalization of individual stock exchanges measures the size of the investible universe and market liquidity in each country. Asian exchanges currently represent 30% and China exchanges (Shanghai, Shenzhen and Hong Kong) represent 17% of the total market capitalization of global stock exchanges.

Global indices

Asia and China are significantly under-represented in global indices like the MSCI, FTSE and Bloomberg Barclays, when compared against metrics like GDP, GDP growth or market capitalization. Currently Asia and China account for an estimated 16% and less than 5% of the MSCI ACWI index. While the weights of Asia and China have increased over time and the global indices have plans to increase the share of China in the future further, investors should clearly consider additional investments in Asia and China beyond the index weights.

Considering GDP, GDP growth and market capitalization, Asia should have a weighting between 30-46%, and China should have a weighting between 17-25% in a well-diversified, forward- looking global portfolio.

The ACATIS QILIN Marco Polo Fund is well-positioned to capture Asia and China investment opportunities. If you have any remaining questions, please do not hesitate to contact us anytime.

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