China Takes an Edge in Stocks to a Trade War

The saber-rattling for a U.S.-China trade war is becoming louder, and many observers are speculating about which country will blink first. One important variable will be the resilience of each country’s stock market, given the potential for mayhem from a melting market. So it’s worth asking which one is more likely to stand its ground.

There are several considerations, most prominently quality, free float and valuation. Let’s see how they stack up for each country.

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China’s Shadow Won’t Eclipse Emerging Markets

China’s parliament begins a two-week legislative session on Monday that is widely expected to clear the way for Xi Jinping to be president for life. As concerned emerging-market investors question what will happen in China, they should remember one thing: China isn’t synonymous with emerging markets.

Investors can be forgiven for conflating the two. Many of them see the developing world through the lens of an emerging-market stock fund, and Chinese companies increasingly dominate those funds.

Consider, for example, that China accounts for 27 percent of the MSCI Emerging Markets Index. That’s 13 percentage points more than South Korea, the second-largest  allocation in the index. It’s also 18 percentage points more than China’s slice of the index a decade ago, when it was fifth behind Brazil, South Korea, Taiwan and Russia.

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Stop Freaking Out About China

With China in the midst of what appears to be a significant economic slowdown, investors are questioning their faith in one of the new century’s great growth stories. They shouldn’t abandon China just yet.

First, some perspective. China was never going to string together an uninterrupted record of astounding annual growth. Despite all the hyperbole in recent years about China’s prowess and coming global dominance, not even China is exempt from the business cycle. But the current contraction will be followed by another expansion, unless you believe that China is going out of business — and no one who is a serious student of the country and its economy believes that. 

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