The Case for Diversification, China, and FLCH in 2023 | ETF Trends

The negative returns for many asset classes in 2022 put immense pressure on portfolios, but Franklin Templeton’s chief market strategist Stephen Dover cautioned against consolidation. Instead, he advocated for greater diversification to capture the points of opportunity arising this year as the Fed levels out on rate hikes. When looking to diversify, one particular country to consider this year is China, which has much stronger economic prospects than most in 2023.

Diversification this year is more important than ever, given the ongoing number of global macro risks carried over from last year.

“The extreme outcomes of last year, characterized by large, simultaneous losses on all major asset classes, were an anomaly stemming from unexpectedly high inflation and aggressive monetary policy tightening,” said Stephen Dover, CFA, chief market strategist and head of Franklin Templeton Institute, in a recent Global Market Perspectives newsletter. “In my view, those developments have now largely run their course and, as a result, cross-asset correlations are likely to normalize to historical averages, producing the benefits of diversification.”

As inflation slows and the Fed reaches a culminating point in its interest rate hikes, the compression that markets experienced last year should give way to recovery for a variety of asset classes this year. Equities will likely continue to face challenges and earnings disappointments, however, and Dover advocated for a more active approach in order to capture the pockets of positive returns.

Opportunity Exists Overseas in China

One such area is China and the companies that will benefit as China moves into recovery mode this year.

“Why China? The answer is macroeconomic momentum,” Dover said, as China moves through and ultimately beyond the rash of COVID infections across the country. “Just as was witnessed in North America or Europe, reopening will result in a burst of economic activity as pent-up demand is unleashed and productive capacity enhanced.”

“Moreover, unlike any other major economy in the world, China is actively promoting growth via easier credit and fiscal policies,” Dover said, going on to add that China’s GDP forecast for 2023 is northward of 5%.

The Franklin FTSE China ETF (FLCH) provides exposure to large- and mid-cap companies in China and seeks to track the FTSE China Capped Index. The index is a free float-adjusted, market cap-weighted index with no single issuer exceeding 25% by weight, and all issuers with more than 5% weight do not collectively make up more than 50% of the index.

FLCH is currently trending above both its 50-day simple moving average (SMA) as well as its 200-day SMA, a strong buy signal for those that trend follow.

The top sector allocations for FLCH currently are consumer discretionary at 29.10% weight as of February 6, 2023, communication services at 18.27%, and financials at 15.62%, and the fund has an expense ratio of 0.19%.

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