China vs. Europe

The current top 10 iShares equity ETFs. China is clearly in the lead with an estimated return of 8.29% a year followed by Europe with 6.23% a year. The rest range from just over  6% to 4.65% for Turkey. All apart from Brazil and Emerging Markets are in uptrends:

 

A closer look at the figures for China and Europe is summarised in the table below:

Fund	PE est	Dividend	Adjusted Yield	Growth Rate	Total Return
China	9.57	2.53%	6.49%	6.50%	8.29%
Europe	12.54	4.18%	6.08%	2.40%	6.23%

Apart from the higher dividend yield for European stocks China wins hands down. A lower PE ratio, an high adjusted yield (dividend yield plus 50% of retained earnings), and China's higher growth rate give it a higher total expected return.

Fund	Price	5yr High	5yr Low	% below high	% above low	Short term target	Target % of high
China	6625	9872	3683	33%	80%	8991	91%
Europe	2003	2829	1614	29%	24%	2361	83%

Both funds are around 30% off their highs and the Chinese fund appears more volatile. The short term targets are based on current earnings and growth forecasts and are prices at which we would start closing our positions if hit within 3 to 6 months. Increasing dividends or growth forecasts would make us revise upward our price targets.

Comparing the sector allocation the European fund is clearly more diversified than the financial heavy Chinese fund:

 

 

For this reason I have increased my exposure to Europe. Despite all the merits of the Chinese fund I feel there is too much downside potential with the high weighting towards Chinese banks in the fund. Additionally not spreading myself too thinly is a concern. I already have some exposure to Chinese stocks in my Far East ex Japan Smaller Companies fund and Asian exposure with the Asian Property Fund.

These changes see the current portfolio looking like this:

Investment	Weighting
iShares EUROSTOXX 50	55.0%
iShares Asian Property	17.0%
Zopa lending	7.9%
DJ-UBS Natural Gas	7.7%
Other Pension Funds	5.7%
iShares Far East ex Japan Small Cap	5.1%
Gold	1.3%
Cash	0.3%

I've invested most of the cash in the portfolio by increasing my holdings in Natural Gas, adding more to Zopa and the European fund that I mentioned above.