Investing in Chinese stocks is a very polarizing topic. Some investors consider Chinese stocks a must-have for their portfolios due to their large size relative to other emerging market economies. Others consider them unsuitable for investment due to various geopolitical or ideological concerns that may affect their future growth. Both arguments boil down to emotional decisions that are heavily influenced by loud news headlines.
Setting emotions aside, it is hard to deny that China is deeply intertwined in the global economy. According to the International Monetary Fund, China continues to boast the second-largest gross domestic product (GDP) in the world after the United States. The Chinese economy is also more than three times the size of the next largest emerging market, India. This economic power gives China the largest single share of most emerging market representatives, weighted by market capitalization.
An overweight position in China exposes broader emerging market investments to a variety of risks. Investing in emerging economies is generally more volatile than investing in more developed countries. Because emerging markets are less established, they may be more susceptible to certain events. There are so many headlines in the modern news cycle that it can be difficult to discern what will impact the market and what is just noise.
Using relative strength to cut through market noise
Relative Strength analysis helps you pinpoint important market trends and use those signals to appropriately overweight (or underweight) your exposure to China. Our relative strength calculation is designed to target long-term outperforming themes while remaining responsive enough to rotate out when market trends require it. In other words, relative strength seeks to minimize exposure to underperforming positions while preserving profitable positions. Most importantly, this systematic, rules-based approach eliminates subjective or “emotional” trading as the calculation is derived solely from price data.
Introducing the NDW KraneShares Tactical Emerging Markets Model
The KraneShares Tactical Emerging Markets Model was launched on the Nasdaq Dorsey Wright research platform as a new investment tool to maintain exposure to the strongest regions in emerging markets. The model is designed to over-expose to China during bullish periods and reduce or eliminate exposure to China during bearish periods. It does this by comparing eight KraneShares ETFs, including seven China stock-focused funds and one ex-China emerging markets fund (ticker: KEMX), against each other. All of these funds are ranked based on their relative strength to other inventory members.
Simply put, each fund is allocated equally in the portfolio. Funds that rank above KEMX are included in the model holdings. Funds that rank below KEMX are allocated to KEMX. This allows the portfolio to maintain a significant overweight to Chinese stocks, but only to the extent that these regions are relatively stronger than other emerging markets.
For more information on how to follow this new model, please contact Nasdaq Dorsey Wright at dwa@dorseywright.com.
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