Middle Kingdom central to balanced portfolio: Malkiel

Allocating less than 9% of your clients’ portfolios to China would be a mistake, according to finance guru Burton Malkiel, speaking this morning at the annual gathering of the Investment Management Consultants Association in Washington, D.C.

“Why would you want to underweight the fastest-growing economy in the world?” he said. “Do you really want your portfolios underexposed to the fastest-growing economy in the world?”

Mr. Malkiel, professor of economics and finance at Princeton University, emphasized that he believes the pace of economic growth in China will continue to grow and overtake the United States as the world’s largest economy by the end of this decade.

“China’s growth rate since 1980 is the most incredible growth ever in the history of the world,” he said. “Unlike Europe, Japan and the U.S., China has a strong balance sheet and $3.3 trillion in reserves.”

He also touted China’s “effective monetary policy,” a consumer savings rate of more than 30% and a consumption level that is only about one-third of gross domestic product — but growing rapidly.

“The Chinese have revered education, hard work, entrepreneurial spirit, a gambling instinct and a government that lets it flourish,” he said. “That’s why China grew the way it did, and will continue to flourish.”

Mr. Malkiel, a strong proponent of indexing, recommends a three-pronged approach to gaining exposure to China.

It starts with broad-market-index exposure, paired with an option call strategy to hedge the risk from what can be an extremely volatile market. He also recommends investing in non-Chinese multinational companies with exposure to the Chinese economy.

“Chinese stocks have never been as reasonably priced as they are today,” he said. “This is certainly an attractive entry point.”

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