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How to Manage Risk in China’s Equity Market

equity
schwartzfinal
by Jeremy Schwartz, CFA
09/19/2012
China has been one of the most sought-after destinations of emerging market investments over the past decade. But today, many people are questioning whether China is still a great investment. They point to slowing growth as a potential reason to avoid China. I believe these naysayers are missing the forest for the trees. China is currently: • Home to the largest population on earth1 • Expected to continue outpacing developed (and most emerging) markets for some time1 • The largest contributor to global growth2 And there are many other reasons to consider China for your emerging market dollars. The biggest challenge I can see for investors is that popular indexes such as MSCI China and FTSE China 25—and the investments that mirror them—are heavily over-weighted to the financial sector. Yes, Chinese financials are currently cheap,3 but I’m not convinced this warrants adding concentration risk in an emerging market. It is hard for me to imagine that investors want to put 40%–50% (or more) of their investment into any single emerging market sector, no matter how cheap it is. I think in the current environment, investors might be better served by investing in China but mitigating the risk of being concentrated in one sector. In my opinion, this can help investors increase their diversification, reduce their risk and mitigate volatility—and may also enhance their returns. The WisdomTree China Dividend ex-Financials Fund (CHXF) may enable investors to capitalize on the growth potential of China without exposure to the financial sector.   Read the whole commentary to learn more about why now may be a good time for investing in China. 1CIA World Factbook, 2012. 2IMF World Economic Outlook, April 2012. 3Bloomberg. As of 8/31/2012 the MSCI China Financials Sector Index has a high trailing 12-month dividend yield and low P/E ratio relative to other MSCI China Sector Indexes.

Important Risks Related to this Article

Diversification does not eliminate the risk of experiencing investment losses. There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. The Fund focuses its investments in China, thereby increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in emerging or offshore markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. As this Fund can have a high concentration in some issuers, the Fund can be adversely impacted by changes affecting those issuers. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
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About the Contributor
schwartzfinal
by Jeremy Schwartz, CFA
Executive Vice President, Global Head of Research

Jeremy Schwartz has served as our Executive Vice President, Global Head of Research since November 2018 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity indexes, quantitative active strategies and multi-asset model portfolios. Mr. Schwartz joined WisdomTree in May 2005 as a Senior Analyst, adding to his responsibilities in February 2007 as Deputy Director of Research and thereafter, from October 2008 to October 2018, as Director of Research. Prior to joining WisdomTree, he was head research assistant for Professor Jeremy Siegel and helped with the research and writing of Stocks for the Long Run and The Future for Investors. Mr. Schwartz also is co-author of the Financial Analysts Journal paper, What Happened to the Original Stocks in the S&P 500? He received his B.S. in Economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Mr. Schwartz is also a member of the CFA Society of Philadelphia.