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Investors should allocate up to 20% of their portfolios to China over the next decade, strategist says

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Key Points
  • Currently, investors globally have about less than 5% of their shares invested into China, according to Paul Colwell, head of the advisory portfolio group for Asia at insurance brokerage Willis Towers Watson.
  • "We just don't think that's enough to be fully prepared for the new world order," Colwell told CNBC's "Squawk Box Asia" on Monday. They need an allocation of up to 20%, he said.
  • He said: "If you believe that the world is moving away from globalization, if you believe that the major economies in the world, particularly the U.S. and China will decouple from each other, then we believe there's a strong case for allocation into China and more than you would have expected otherwise."

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Investors should allocate up to 20% of portfolio in China over next decade, analyst says

SINGAPORE – Investors need to allocate more of their portfolios into China, as "geopolitical diversification" is going to be a more crucial consideration in the years ahead, according to one investment strategist.

Currently, investors globally have about less than 5% of their shares invested into China, said Paul Colwell, head of the advisory portfolio group for Asia at insurance brokerage Willis Towers Watson.

Pension funds and endowments have between 3% and 5% allocations to China, according to a Willis Towers Watson report, which cited a recent survey by data analytics firm Greenwich Associates.

The weightage of Chinese A-shares — or shares that are traded on the mainland — is 5.1% of the MSCI Emerging Markets index as of August 2020, according to the index provider.

"We just don't think that's enough to be fully prepared for the new world order," Colwell told CNBC's "Squawk Box Asia" on Monday. They should increase their allocation to Chinese shares up to 20% over the next decade, he added.

"For investors to properly position their portfolios for the post-Covid world ahead, in the new world order, they need to have more of their investment portfolios allocated into China," Colwell said. "Geopolitical diversification is going to be a much more important portfolio … consideration in the years ahead."

If you believe that the world is moving away from globalization, if you believe that the major economies in the world, particularly the U.S. and China will decouple from each other, then we believe there's a strong case for allocation into China.
Paul Colwell
head of the advisory portfolio group for Asia, Willis Towers Watson

China has been embroiled in trade disputes with the U.S., Europe, Australia and India this year.

Since 2018, Beijing has been in a trade dispute with the U.S. which culminated in a "phase one" trade agreement earlier this year. Still, tensions continued to escalate and moved to the tech space, as Washington increasingly targeted Chinese technology giants — from phone maker Huawei to video-sharing app TikTok. 

Tensions between China and Australia have also intensified in recent months. It came after Canberra called for a global investigation into the origins of the coronavirus.

The move angered Beijing, which imposed trade curbs on Australian imports — the latest being anti-dumping tariffs of up to 212% on Australian bottled wine imports, which China announced late Friday.

Regarding trade tensions, Colwell told CNBC they will just create "a lot of noise" and short-term market volatility.

However, he said: "If you believe that the world is moving away from globalization, if you believe that the major economies in the world, particularly the U.S. and China will decouple from each other, then we believe there's a strong case for allocation into China and more than you would have expected otherwise."

"The China A-share market is relatively lowly co-related with developed markets. The Chinese economy operates at a fundamentally different frequency to that of the other major geographies, driven by different approach to monetary policy, economic policy," Colwell added.

Being allocated into Chinese shares will therefore enhance the "resilience, robustness" of global portfolios, he said.