Feel that? That’s me flicking your ear. Time to pay attention!
That’s me flicking your ear. Time to pay attention.
Chinese stocks might just be THE most compelling buy across world markets right now if you’re prepared to ride them for the long term.
One reason is right there in the Financial Times for all to see. Index provider MSCI is considering boosting the weighting of Chinese A shares in its flagship Emerging Market index.
We could be talking a potential US$1 trillion flowing into the Chinese markets from this over the next decade.
Numbers don’t get much bigger than that in the investment world.
This is a story to follow for a long time to come.
Here’s the kicker. This latest news from MSCI comes just months after including Chinese shares for the first time.
Things are moving quicker than anyone previously thought.
The biggest anomaly in the world right now
A bit of backstory is important here.
Chinese stocks are second only to the United States in market value.
But very few people outside of China own any of them. This is because Chinese stock markets aren’t open to foreign buyers in the same way as those in the US or Australia.
This is slowly changing.
Until recently, the Emerging Market index from MSCI didn’t have Chinese A shares included at all.
That’s a pretty big omission when you consider that China is the second-largest economy in the world.
In May, MSCI finally allocated an initial, small percentage (less than 1%) to 230 Chinese shares, with a view to expanding the weighting over time.
The market is closely watching this. There’s an astonishing US$1.9 trillion dollars of assets benchmarked against this index alone.
Here’s the gig with this. If you buy, for example, an Exchange Traded Fund that tracks this index, it will almost certainly buy the Chinese shares that MSCI includes and sell whatever stocks are dispatched to make way for them.
This could send an awful lot of money into Chinese stocks over time.
MSCI suggests the weighting for Chinese A shares could hit as high as 17%.
And we’re only talking one index here. The same effect would happen if any other ones decide to join the party.
That takes us back to today.
MSCI is suggesting it could double the amount of Chinese stocks it holds to 434 by May 2020.
Oh, and what’s this?
Just this morning, Reuters reported that another global index provider, FTSE Russell, is going to include Chinese ‘A’ shares as well.
US$16 trillion is benchmarked against all of FTSE indices.
This is likely going to send even more money toward Chinese stocks.
And they’re pretty battered and bruised at the moment.
In my view, that makes it even more compelling to scoop some up now while they’re on the floor.
The trade war won’t stop US bull market
What dragged the Chinese stock markets in the first place?
The trade war.
But US stocks are still flirting around all-time highs.
This suggests the market is not pricing in some sort of calamitous outcome from all this.
China and the US may snipe at each other, and try and undercut various sensitive industries, but overall the world will keep turning.
It’s not so hard to see the potential for Chinese stocks to bounce.
Fund managers looking for better value than US stocks could easily turn their eyes to China.
It’s not as if the Chinese economy doesn’t have its own domestic drivers.
So far today, we’ve talked about foreign money flowing into Chinese stocks.
There’s plenty of wealth creation going on inside China.
Hong Kong now has 30% more ultra-rich residents than New York.
All this wealth is going to show up in demand for asset managers, and, obviously assets!
Australia has a role to play here, too.
The Australian reported today that Australia’s attraction for high net worth Chinese could see a prodigious expansion in private wealth accumulation here.
More wealthy Chinese settled in Australia in 2017 than anywhere else in the world.
It could make the Aussie stock exchange ‘a key centre of activity for Chinese firms’, according to the article.
I don’t doubt it.
The expansion of wealth coming out of Asia is of historic proportions.
It’s another reason I pay no attention to people who expect a repeat of the GFC.
The fact that such commentators still receive such a credible hearing is, counter-intuitively, a clue that it’s highly unlikely to happen.
Money stays out of the market in this environment.
There’s just no sense of euphoria around stocks at all.
Asset markets tend to favour the optimists over the long term.
Crashes are rare. Good returns are not.
A good rule of thumb is to take advantage of dips when you can, when they’re exposed to a long term trend up.
Chinese shares look like that kind of opportunity to me.