I’m not sure about China as it might be too corrupt for passive investing to work.
That’s an interesting offhand comment. Does that imply that EMH doesn’t apply to financial assets in corrupt economies, specifically to external (foreign) investors who can come and leave as they want?
Also, while China’s official economic numbers are highly suspect (see e.g. this), it looks very likely that it is one of the three world’s biggest economies (along with USA and EU). Can a passive investor afford to ignore it?
To help mitigate the currency risk of investments?
Well, it doesn’t mitigate the risk, it just partially avoids it. You are right in that investing in foreign countries brings with it FX risk and while it’s easy to hedge a lot of people are not going to bother.
Another interesting thing here is that the currency markets do not fall under EMH, both empirically (they are clearly not a random walk) and theoretically (the preconditions for EMH do not hold).
Another interesting thing here is that the currency markets do not fall under EMH, both empirically (they are clearly not a random walk) and theoretically (the preconditions for EMH do not hold).
Can you please elaborate on that? Do you mean the prices themselves are not a random walk or do you mean the prices are not a random walk after adjusting for interest rate differences?
And what preconditions don’t hold for currency markets?
Does that imply that EMH doesn’t apply to financial assets in corrupt economies, specifically to external (foreign) investors who can come and leave as they want?
Yes, although with China you can’t necessarily leave when you want as the government might restrict sales.
Can a passive investor afford to ignore it?
No, but by investing in U.S. firms that do business in China you are not ignoring it.
by investing in U.S. firms that do business in China you are not ignoring it
We are talking about index funds. I don’t think a US equity index will give you any meaningful exposure to specifically China (as opposed to, say, some global factor like risk appetite).
You are right about Japan. I’m not sure about China as it might be too corrupt for passive investing to work.
To help mitigate the currency risk of investments? (Although I’m not sure about this answer.)
That’s an interesting offhand comment. Does that imply that EMH doesn’t apply to financial assets in corrupt economies, specifically to external (foreign) investors who can come and leave as they want?
Also, while China’s official economic numbers are highly suspect (see e.g. this), it looks very likely that it is one of the three world’s biggest economies (along with USA and EU). Can a passive investor afford to ignore it?
Well, it doesn’t mitigate the risk, it just partially avoids it. You are right in that investing in foreign countries brings with it FX risk and while it’s easy to hedge a lot of people are not going to bother.
Another interesting thing here is that the currency markets do not fall under EMH, both empirically (they are clearly not a random walk) and theoretically (the preconditions for EMH do not hold).
Can you please elaborate on that? Do you mean the prices themselves are not a random walk or do you mean the prices are not a random walk after adjusting for interest rate differences?
And what preconditions don’t hold for currency markets?
The currency rates are not a random walk (it’s easy to verify that emprirically) either before or after adjusting for the interest rate parity.
What makes currency markets different is that they have huge powerful players—central banks—which are not driven by the profit motive.
Yes, although with China you can’t necessarily leave when you want as the government might restrict sales.
No, but by investing in U.S. firms that do business in China you are not ignoring it.
US firms? Your main China exposure is going to come from your Aussie mining exposure.
We are talking about index funds. I don’t think a US equity index will give you any meaningful exposure to specifically China (as opposed to, say, some global factor like risk appetite).