Portfolio updates: Reducing allocation to China equities

May 22

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It has been almost 6 months since I've transitioned my cash investments rom a robo-advisor managed investment portfolio to a self-managed model and I finally found some time to share their performances so far.

Performance of my cash investment portfolio

The market has been bearish for the entire year so it's needless to say that all my cash portfolios are in the red.

Portfolio

Objective

Performance (YTD)

Core Portfolio

Invest in a diversified portfolio of ETFs that suits my macro views of the economy to generate long term accumulation of wealth consistently >6% with moderate volatility each year.

-16.44%

Growth Portfolio

Invest in assets to generate long term accumulation of wealth consistently >6% with moderate volatility each year.

-55.46%

Dividend Portfolio

Generate >5% dividend yields yearly which will be reinvested into the portfolio until retirement age is reached.

-0.39%

Health Sinking Fund Portfolio

Invest in assets to generate long term accumulation of wealth to pay for health-related expenses during retirement years

-18.4%

While my Growth Portfolio stands out from all the portfolios, the portfolio only consists of a single stock (Palentir) in the portfolio and this particular stock has been hammered badly for the entire year. It is also important to note that this portfolio is only 1% of my entire net worth and rather insignificant in the grand scheme of things.

I have also added a new portfolio called Health Sinking Fund which is a separate portfolio that aims to accumulate funds to eventually fund any health-related expenses that may incur after I retire. This portfolio is meant to complement with my critical illness and hospitalisation insurance policies and can pay for expenses that can't be claim from my insurance policies.

I would say that the YTD performance of all my portfolios are all within my expectations and risk appetite so I have no issue sleeping well at night.

The worsening Zero-Covid situation in China

If you have been following the pandemic situation in China, you will know that China still isn't giving up on their Zero-Covid strategy. It has been tough for everyone, from government officials to medical professionals and all the way down to the locals.

I have been following the unofficial sources on Youtube because I believe that western sources are going to be either biased or outdated, while the China government wouldn't be forthcoming about their Zero-Covid strategy.

Even before the pandemic, the China workforce has been suffering from work burnout (内卷) to choosing not to work (躺平). The Zero-Covid situation has worsen the China economy, especially in Shanghai where arguably the brightest and smartest have been placed under lockdown. The lack of access to groceries, food and basic medical care has strained the relationship between the Chinese government and its people.

Living in an expensive city with close to zero income is very challenging and that forced Shanghai residents to consider running away (润), either back to their home country (for foreign expats) or back to their hometown (for Chinese citizens who moved to Shanghai for work opportunities).

Unofficial sources on Youtube have also reported that the Chinese government is making it harder for citizens to leave China. Several videos seem to indicate that the immigration officers would check whether the citizen has made negative comments about the Chinese government on social media and if evidence were found, the immigration officer would go to the extent of cutting up the citizen's passport to prevent them from leaving the country.

The last straw on this matter for me is a recent video that trended, called "we are the last generation, thank you" (我们是最后一代,谢谢). A resident was being asked to go into the quarantine center because another resident in the compound was tested positive for Covid-19. Apparently if a resident is tested positive for Covid-19, all residents within the same compound would be brought to the quarantine center for quarantine (sounds absurd, but true). The resident in the video refused to go, stating that his family are all tested negative for Covid-19 and it's illegal force him to go to the quarantine center. The police officer threatened the resident saying that if he doesn't comply, he will have to bear the consequences later and added that this could impact 3 generations (him and 2 more generations after him). The resident calmly replied, "we are the last generation, thank you."

This video became a trending topic and sparked a massive discussion within the Chinese community on whether they still want to have kids in the current situation because they think that their kids would suffer when they grow up, based on how the country is being managed today.

Again, I stress that these are all from unofficial sources on Youtube that we have to all take such information with a pinch of salt.

While I have no statistics on hand, my take is that the Zero-Covid situation would still be in limbo for a while because the Chinese government is prideful and would not 'lose face' by reversing on their Zero-Covid decisions that easily. It also looks like the next city to be hit with a lockdown would most likely be Beijing.

My take is that Shanghai residents are waiting for the lockdown to end and those with the financial means and capabilities would most likely attempt to leave the city, or even the country. For other cities that are not under lockdown, I'm sure the residents (both locals and expats) are already planning or making their moves as we speak after seeing how Shanghai is being managed in this lockdown.

Changes to my portfolio allocation

With so much uncertainty in China, my opinion is that China will take at least 2 years to recover and China equities would continue to be on a downtrend until recovery happens. I would re-assess this again if the Zero-Covid strategy is reversed.

As such, I will be reducing the allocation to China equities in my Core Portfolio from the current 10% to 5%.

Since I am still actively contributing to my Core Portfolio each month with a portion of my salary, I will be using the Cash Flow Rebalancing method to rebalance my Core Portfolio - using the monthly cash inflow to invest in allocations that are under-weight to reduce the rebalancing drift.

Asset

Asset Type

Target Allocation

iShares Core MSCI World UCITS ETF USD Acc (IWDA)

Equities

(Developed markets)

80% 85%

iShares FTSE China A50 ETF (2823)

Equities

(China)

5% 2.5%

iShares Hang Seng Tech ETF (3067)

Equities

(China)

5% 2.5%

NetLink Trust (CJLU)

Bond Alternatives

(Dividend stocks)

5%

Stable coins

Bond Alternatives

(Cryptocurrencies)

5%

Are you making any changes to your portfolio?

With all the uncertainties impacting the markets right now, are you making any adjustments to your investment portfolio? I just want to emphasize that it's important to do your own research and decide on your own instead of blindly following others.

If you are planning to make changes to your investment portfolio, I'd love to hear your plans in the comments section below.

Photo by Christian Lue on Unsplash

You won't trust Mickey Mouse to manage your portfolio so there's no reason to trust Mickey J to make insurance or investment decisions for you either. The contents in this article should be considered as entertainment only and you should do your own due diligence before making any investment decisions.

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About the author 

Mickey J

Mickey is your typical white-collar Singaporean who works regular hours in a job with a strong passion on personal finance. He writes mostly about personal finance, investing, insurance and retirement planning. He also embraces the Financial Independence and Retire Early movement (FIRE), tweaking the FIRE concept to his lifestyle.

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  • Thanks for sharing your view on china. On the contrary, I’m actually thinking of increasing my exposure to china. I’m in the view that china can just decide to open up if they suddenly wakes up unlike democratic countries, where you need to discuss with the parliament, with the people, with the opposition and what not. Chinese stocks are already depressed especially the tech stocks, but once it goes up, it will move really fast. Like for example Alibaba, core business is still doing great despite the ongoing lock down and constantly bogged down by political reasons.

    • Thanks for sharing your thoughts.

      I think it’s a valid comment that if the Chinese government decides to reverse their decision and grow their capital markets, things can move really quickly because of the authoritarian rule. However, unlike the US where presidents don’t stay beyond 3 terms and the new guy can always reverse decisions made by the previous guy without any worries, the Chinese government will find it difficult to reverse their decisions without losing face.

      Unless there is a good excuse that allows the government to change their path without being perceived by the world as a loss of face, I think it will be challenging to expect them to give up on their Common Prosperity policy and revert to past capitalism ways.

      But again, it’s just my view and I’m no economist. Which is also why I’m still allocating 5% of my portfolio to China, which is more than what most globally diversified ETFs have allocated for China to stay in the game.

  • If market is down and not expected to recover in the next 2 years, should you increase your allocation in china in the next 2 years?

    • Interesting point. Let’s say the China market did not recover and either went on a downtrend or trended sideways for the next 2 years. Should I increase my China equities allocation?

      My view is that I wouldn’t increase my China equities allocation because there are many other investment opportunities out there.

      The developed markets (specifically US) is also pretty much bearish for most of the first half of 2022 and looking at past performance, I am more confident that my allocation into developed markets would eventually recover and resume its uptrend in the next 10 years. Unfortunately, I can’t confidently say the same for China equities.

      I’m going to stress that this is just my point of view and what I am doing with my money. I could be 100% wrong. This is not financial advice and you will need to do your own research and make your decisions from there.

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