Another reason not to fear Chinese stocks
Diversification of H-share returns near a two-year high
How risky are Chinese stocks? One key measure is the degree of diversification of returns. If all the stocks in an index move in the same direction, it usually means they are running from (or toward) the same thing. If they move in different directions, it means that investors are rebalancing portfolios in response to economic conditions, regulatory changes, or other factors.
A simple way to track the extent of diversification is to calculate the standard deviation of daily returns across the index. In the case of the Hang Seng China Enterprises Index, the main H-shares index, diversification now stands at around the highest level of the past two years.
That’s not surprising. This week the tech names were in the tank following the corresponding sell-off in New York. The previous week, the insurers got beaten up on regulatory concerns. Apart from year-end profit taking, though, there’s nothing that looks like a systemic problem in China.