Do You Have too Much Exposure to India and China?
You may have more than you think. We tell you how to find out and why it could be a problem.
The best way to prepare for changes to the status quo is to ensure that your portfolio is well diversified. If you’ve got too much exposure to India and China, then you should pare back your holdings. Obviously, if you own an India or China-focused fund, then it’s pretty clear where your direct exposure lies. But increasingly, many diversified Asia ex-Japan and emerging markets funds have loaded up on both countries. Indeed, the typical Asia ex-Japan available for sale in the UK has about a 40% stake across both countries, while the average Global Emerging Markets offering had about 17% invested in India and China. And if you own both an Asia ex-Japan and India fund, you might end up owning a lot of the same stocks. For instance, nearly half of First State Global Emerging Market Leaders fund’s holdings overlapped with sibling First State Asia Pacific at the end of last year.
Making things more complicated is the fact that many core fund managers have got into the act too. Their mandates may prevent them from investing in emerging markets directly, but that doesn’t prevent them from investing in developed market stocks that benefit from growth in India and China. That’s why some funds, such as Majedie UK Opportunties, have devoted big chunks of their portfolios to energy and basic materials stocks, which have reaped huge gains from India and China’s rise. Indeed, the two sectors comprise just over half of the Majedie offering’s portfolio. Its top holding, BG Group, is a natural gas producer with operations in four continents, including Asia (China and India among others).
So what should you do? Diversification is one of the most-potent weapons you can deploy to shield yourself from volatile investment climes. Be sure you don’t have too much exposure to emerging markets, in particular India and China. You can gauge the extent of your own exposure by entering it in on Morningstar.co.uk and using Morningstar’s Instant X-Ray, which will display the regional weightings of your holdings taken as a whole. Also, check your exposure to economic sectors such as energy and industrial materials (where mining and other non-energy commodities shares reside)--these areas could easily fall in tandem with China or India should one or both take a turn for the worse.
Asia bulls argue internal demand will help insulate the region from difficulties elsewhere in the world. While this may be true to some extent, it's worth remembering that globalisation is a double-edged sword. If Asia can benefit from an increasingly globalised environment then how can it possibly remain immune to global weakness? Domestic demand and intra-regional trade may delay the inevitable or soften the blow but it can't insulate Asia altogether from a global slowdown. No one knows for sure, of course. For that reason, we wouldn’t advocate bailing out of emerging markets funds or those with large India and China stakes altogether. But by not going overboard and keeping your holdings diversified, any slump won’t torpedo your nest egg.
