Updated with clarification
Institutional investors should consider quadrupling exposure to Chinese risk assets over the coming decade under a range of geopolitical and economic scenarios, a report by Willis Towers Watson contends.
The report, Allocation to China in a new world order — examines a range of geopolitical outcomes, including a continuation of U.S. dominance, a global order where China displaces the U.S., a multipolar world and one where globalization gives way to regional blocs.
For most scenarios, an allocation to China of 20% or more for the risk asset portion of investors' portfolios makes sense, up from roughly 5% at present, said the report's author, London-based director of investment research Liang Yin, in an interview. Risk assets include equities, credit and infrastructure, among others, he said.
Heightened U.S.-China tensions and the backlash against globalization have multiplied the number of short-term concerns facing investors but, "we argue that recent events in fact (have) reinforced, as opposed to weakened, the case for global investors to own more Chinese assets," Mr. Yin wrote.
For example, in an environment where globalization remains ascendant, whether led by the U.S., China or more than one economic power, investors can tap into China's growth by investing in multinational companies with businesses on the mainland.
If, instead, the coming decade sees a globalized economy give way to regionalization — WTW's most likely scenario with a 45% probability — "the case for geographic diversification is stronger, not weaker," Mr. Yin wrote. Under that scenario, institutional investors should allocate 25% of their portfolios to Chinese assets, he said.
That scenario would see the world economy devolve into a U.S.-led Americas bloc, the eurozone and an Asia region led by China, marked by more regional supply chains, increasing barriers to interregional trade and a corporate world marked by regional champions. Along the way, multinationals will "get dismantled," Mr. Yin wrote.
While the report posits three additional scenarios where globalization remains dominant, only for the case where the U.S. continues to lead the way — a 15% probability by WTW's calculus — does the report call for a more modest China allocation of 10%.
For a China-led global system — a 10% likelihood — the report recommends a 35% weighting to Chinese assets. For a multipolar global system, which WTW contends is a 20% probability, a weighting of 20% makes sense.
The final scenario, a disruptive end to globalization, accompanied by a surge in nationalism, could bring about an unstable repeat of the situation that preceded the World War I, marked by "a leaderless world (where) great powers adopted a dangerous zero-sum mentality driven by populism and nationalism," the report said. In that scenario, a 10% probability, the weighting to Chinese assets should be zero, Mr. Yin said.