By Justin Spittler, editor, Casey Daily Dispatch
Hours from now, one of the biggest investing events of the year will take place.
This event should send billions of dollars into a stock market that’s largely cut off from the rest of the world. It could even trigger a triple-digit rally.
Yet very few U.S. investors stand to profit from this.
I’m talking about a special kind of Chinese stock. As you’re about to see, less than 1 out of 100 American retirees owns these shares. But you can buy them today…before they shoot to the moon.
I’ll show you how to do that at the end of this essay. But you need to understand something important first…
• China’s stock market has two kinds of shares…
Its “A-shares” trade in Shanghai and Shenzhen, or mainland China. It also has “H-shares,” which trade in Hong Kong.
Right now, many people own H-shares. But only about 2% of foreigners own China’s A-shares.
The reason for this is simple. MSCI doesn’t include A-shares in its Emerging Markets Index. It only tracks H-shares.
This is a huge deal. You see, MSCI is one of the most influential investing companies on the planet. It indirectly controls more than $10 trillion. About 94% of U.S. pension funds invest in global stocks that MSCI tracks with its indexes.
But none of that money finds its way to China’s mainland.
• Again, that’s because MSCI doesn’t track A-shares…
It makes absolutely no sense.
After all, China is the world’s biggest economy. And it has the biggest stock market after the United States.
You would think MSCI would track China’s mainland stock market due to its sheer size. But it doesn’t. And that’s kept billions of dollars out of Chinese A-shares.
But that could change in the next 24 hours.
• Tomorrow, MSCI will decide if it’s going to add A-shares to its Emerging Markets Index…
If it does, Chinese A-shares will make up 0.5% of the MSCI Emerging Markets Index.
That doesn’t sound like much. But MSCI’s Emerging Markets Index is massive. It tracks $1.5 trillion worth of stocks.
So, this decision could push $7.5 billion into China's mainland stock market practically overnight. And that’s just the beginning…
Eventually, MSCI wants China to make up 40% of its Emerging Markets Index. That’s 49% more than its current weighting.
Put another way, tomorrow’s decision could ultimately send more than $700 billion into Chinese stocks.
That’s a staggering amount of money. And most of that would pour into China’s mainland market, which is critically underrepresented in MSCI’s Emerging Markets Index right now.
• There’s a good chance that MSCI will do this tomorrow…
Goldman Sachs recently put the odds of this happening as high as 60%. Other experts put the chances as high as 75%.
But even that seems low.
After all, the Morgan Stanley China A Share Fund (CAF), which tracks Chinese A-shares, is up nearly 6% today. That’s a giant gain for one day.
But CAF and other A-share funds should soar even higher in the months ahead for one simple reason…
• When Chinese stocks rally, they rally in a big way…
You can see what I mean below. This chart shows the performance of China’s Shanghai Composite Index since 2005.
You can see that China’s A-shares have had three explosive rallies over the last 12 years. The average gain during these rallies was 267%. That’s more than the S&P 500 has gained over the past eight years.
If MSCI does what’s expected tomorrow, we could see another rally like this in the months ahead.
You’ll obviously want to own Chinese A-shares before that happens. The easiest way to do this is to own CAF or another fund like it.
Just understand that this is a speculation. So only bet money that you can afford to lose. Take profits when you get them. And use trailing stop losses to limit your downside.
Delray Beach, Florida
June 19, 2017
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