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When building an investment portfolio, both emerging markets and international markets commonly are recommended for moderate to aggressive investors. But, many investors are unfamiliar with the differences between the two asset classes and how they enable an investor to capture additional portfolio gains. And, another common question of many domestic investors is, “how can I invest into the Chinese stock market and which asset class does this fall into?”
Emerging markets is a fairly misunderstood, especially when it comes to the Chinese stock market. With regards to the Chinese stock market, many investors do not understand why China is considered to be an emerging market. Companies that are classified as emerging are generally done so due to developments and reforms that are ongoing in the country. The classification, as in the case of the Chinese stock market, is not solely based on the economy’s strength or size, as China’s 1.3 billion people and strong economy would not indicate to the novice investor that it was an emerging market. China and the Chinese stock market are emerging onto the scene and while the country continues to be under reform, its classification will remain as emerging.
A Deeper Understanding of the Emerging Markets
Emerging markets are generally in the process of becoming an open market economy after being closed for some time. In addition to China and the Chinese stock market, other examples include the former Soviet Union and many other Eastern bloc countries. The goal of an emerging market is to build stronger and more independent economic performances as well as contributing globally to other marketplaces. Another characteristic of emerging market economies is that their exchange rate systems are strengthening, bringing additional foreign investment into the country. Due to the success of the China economy, investment both domestically and abroad into the Chinese stock market is on the rise. Investor confidence is strengthening with regards to the Chinese stock market, bringing in additional capital to this emerging market on a consistent basis.
Portfolio Risks
Emerging markets will appear in investor portfolios that are moderately aggressive to aggressive, although they may have a small presence in a more conservative portfolio under many circumstances. Securities found on the Chinese stock market as well as those found in domestic accounts may satisfy the requirement of an emerging market presence within an investment portfolio. One important factor to keep in mind when selecting any investment is the match between investor risk tolerance and security selection. For example, emerging markets due to the nature of their economy’s state are more volatile than an established economy. This potentially could mean more volatility within an investment portfolio. And, investors need to be aware and comfortable with this risk before making an investment.
Understanding emerging markets and their place in an investment portfolio is important when determining the best mix of asset classes and their percentage weighting in a portfolio.
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