The boom is underway in China…
Chinese stocks have been leading the global market higher this year. The Shanghai Composite Index is up about 23% so far in 2019. That makes China one of the best-performing markets now.
Investors around the globe are finally starting to pay attention, too. That’s a major shift from last year, when fears dominated the news and prices were falling.
Even Wall Street is getting on board…
Last month, investment bank Goldman Sachs wrote a report on the potential upside in Chinese stocks.
According to a Bloomberg story on the report, Goldman Sachs said that Chinese A-shares “would give approximately 50% and 15% potential upside from current levels if retail optimism were to return to its peak in 2015 and 2018, respectively.”
In other words, if individual investors get excited and invest at the peak levels we’ve seen in the recent past, Goldman sees up to 50% upside – in the entire Chinese stock market.
That’s a huge statement. Investment banks like Goldman Sachs tend to be conservative about these estimates. To them, predicting a 12% gain would be big. So putting out 50% potential upside – for an entire market – is a huge deal.
Today, I’ll share one reason why Goldman is likely right. It has to do with a huge amount of money flowing into Chinese stocks this year.
Let me explain…
Goldman says 50% upside is possible because “fear of missing out” (or “FOMO,” as the kids say) is driving investors back into China.
Part of the FOMO comes from the recent rise in Chinese stocks. As those gains stack up, investors will rush back into the market so that they won’t miss the next push higher… And that buying spree will help spur even higher prices.
That’s not the only FOMO-driver Goldman Sachs sees for China, though…
Another part comes from the big story I’ve covered in recent years… the inclusion of Chinese A-shares in global indexes. The short version goes like this…
Until last year, global index provider MSCI didn’t include local Chinese A-shares in its stock market indexes. So if you invested in the MSCI Emerging Markets Index, for example, you weren’t actually buying any stocks trading in mainland China.
That’s crazy to think about. China is the world’s second-largest economy and has one of the world’s largest stock markets. Not holding Chinese A-shares was a wrong MSCI needed to right… And it started doing so last year.
In 2018, MSCI moved a small portfolio of local Chinese stocks to its emerging markets index. It added just 5% of the eventual inclusion amount. But that meant billions of dollars flowed into A-shares.
Now, the next wave of cash is about to move…
MSCI recently laid out its plan for A-share inclusion in 2019. The company plans to quadruple the weighting of A-shares in its emerging markets index this year.
Again, A-shares make up just 5% of their eventual inclusion total right now. But that will shift to 20% through a three-step process this year. It should look something like this…
- In May, the total inclusion of Chinese A-shares will double from 5% to 10%.
- In August, the total inclusion will rise from 10% to 15%.
- In November, the total inclusion will jump from 15% to 20%.
This will result in billions of dollars flowing into Chinese A-shares. The numbers get large, fast.
Around $1.8 trillion in assets is benchmarked to the MSCI Emerging Markets Index. This shift will mean roughly 2.5% of that amount will move into Chinese A-shares this year alone.
That might not seem like much… but 2.5% of $1.8 trillion is roughly $45 billion.
That’s a huge mountain of cash. And it’s a big reason why Goldman Sachs believes FOMO could take over the Chinese market.
I expect the same thing to happen. I believe the recent rally in Chinese stocks will continue, thanks to this shift.
What’s crazy is that the $45 billion set to flow into Chinese stocks this year is only the start. As I’ll share tomorrow, we could eventually see $2 trillion move into the Chinese market in the coming years.
Until then…
Good investing,
Steve
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Source: Daily Wealth