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China Poses A Hidden Risk For Many 401(k)s

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.


This article was written by a veteran financial journalist. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. No one can predict the future of the stock market or any investment, and past performance is never a guarantee of your future results.


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This article was written by a professional financial journalist for Rekow Management, LLC and is not intended as legal or investment advice.

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