Steve's Favorite 'One Click' China Investment Today
Editor's note: It's just a matter of time before China's entire stock market doubles, our colleague Steve Sjuggerud says.
That's why this weekend, we're sharing some of Steve's recent commentary on Chinese stocks.
Today's Masters Series essay is adapted from the March issue of True Wealth China Opportunities. In it, Steve explains what happened the last time index provider MSCI added countries to its indexes... and shares the name of one investment you can buy today to get in ahead of the investing herd...
Steve's Favorite 'One Click' China Investment Today
"Steve, there are riots happening right outside your hotel!" my only contact in Jakarta, Indonesia told me over the phone.
"All our meetings are off! Whatever you do, don't leave your hotel room!" Then he hung up.
I looked out my hotel room window... and couldn't believe what I saw.
I saw fire. And young people throwing stuff. And young people breaking stuff.
I saw anger. And frustration. Like I've never seen in my life.
It was 1998. I had just landed in Jakarta a few hours earlier.
I reflected for a moment, sitting on the edge of the bed, staring at the phone. I was 100% alone, thousands of miles from home, and riots were happening just below me. No friends or colleagues. No cellphone. No Internet. Just me and a hotel room... for who knew how long.
What had I gotten into?
I had gotten into the final days of the 31-year rule of President Suharto.
The Indonesian rupiah had lost 80% of its value in the past year. The stock market was down more than 90% in U.S. dollar terms. The rumor was that only 22 of the hundreds of companies trading on the Indonesia Stock Exchange were solvent.
A day or two later, when the riots dissipated and things calmed down a bit, I had a meeting with the head of Indonesia's central bank.
It's not often that a kid in his twenties (me!) gets a meeting with the most powerful figure in finance in the world's fourth-biggest country by population. But Indonesia was desperate for help.
I asked him what his plan was to stop his currency from falling. He replied, "Got any ideas?"
He was only half-joking. Indonesia was falling apart.
For much of Suharto's presidency, Indonesia experienced significant economic growth and industrialization. The country's economy grew an average of 7% a year while he was in power.
However, after his 31-year reign, Transparency International called Suharto "the most corrupt leader in modern history." He was accused of having embezzled between $15 billion and $35 billion.
I got a firsthand view of a "President for Life." So I am biased against the idea, to say the least.
This isn't just an Indonesia story, as you are well aware. History is littered with examples of how leadership with no term limits has turned out badly – and how the countries involved have ended up worse off.
Hugo Chavez eliminated term limits in Venezuela in 2009. Vladimir Putin circumvented the existing term limits in Russia – he has now entered his fourth term. And, as I'm sure you've heard, the Communist Party just eliminated term limits in China.
My good friend Peter Churchouse has been based in Hong Kong since 1980, and he's been analyzing and commenting on China for nearly 40 years. He recently wrote to his subscribers about China's new move to abolish term limits:
In the bigger picture, a big danger of the "president for life" approach is the potential for policy mistakes to go unchecked. In other countries, we've seen leaders start out reform-minded. But under the golden halo of absolute power, they became an autocratic "bad emperor" without any formal constitutional means of ridding the system of its excesses.
So far, there have been few major policy blunders in China that have had the potential to bring the economic system crashing down. But the imposition of unchecked, unlimited power increases the risks of such errors over time.
Peter is exactly right. The question for us is, how will this affect our China investments?
Here's the thing...
I launched True Wealth China Opportunities for two reasons: 1) to capitalize on the once-in-a-lifetime opening up of China's markets to the rest of the world, and 2) to get ahead of the once-in-a-lifetime movement of hundreds of billions of dollars into Chinese stocks over the next few years.
We got in.
And importantly, we intend to get out once these once-in-a-lifetime opportunities pass.
While the lesson of history is that "President for Life" is not a good thing in the very long run... we are not in this trade for the very long run.
Here's another thing... Stock markets hate uncertainty. And over the next few years that we will be active in Chinese stocks, it appears we will have certainty in China. President Xi will be in power, period.
We still have a great window of opportunity in China. Stocks are still reasonably priced, and outside investors have not bought in yet. We should have a reasonable period of certainty in the markets. And importantly, our reasons for buying are still intact.
We need to take advantage of this.
MSCI Inclusion Is Around the Corner
We're just a few months away from the first tidal wave of money moving into China.
Last June, MSCI announced a plan to include local Chinese A-shares in its benchmark emerging markets index. This was huge news. The potential inclusion from MSCI was one of the major reasons I launched this newsletter.
Chinese A-shares have rallied dramatically, thanks in part to the announcement. And with MSCI set to begin its inclusion process this month, we're quickly approaching the beginning of what could eventually be $1 trillion flowing into Chinese A-shares.
This is exactly what we expected to happen. And importantly, you haven't missed it yet. I believe Chinese A-shares will still move dramatically higher from here.
Let me explain why... by showing you how China is a unique case for MSCI...
You see, MSCI handles changes to its indexes all the time. MSCI moves countries up and down its rankings every few years.
The last two countries MSCI elevated were Qatar and the United Arab Emirates (UAE). Both were considered frontier markets – developing countries that are too small to reach the next category – until MSCI announced in 2013 that it would re-classify them as emerging markets.
In both cases, these countries had massive rallies after MSCI's announcement through the day inclusion began. Take a look...
Qatar rallied 51% over this period. The UAE nearly doubled... jumping 93% in less than a year. (Both of these returns include dividends.)
These were big rallies. The hype an index gets when the flood of money from MSCI is coming is huge. And the biggest gains tend to happen right at the end.
You can see it in the chart below. Most of the gains for both indexes happened in less than three months leading up to inclusion...
Both indexes saw more than half of their massive returns in the final three months. This is good news for our Chinese A-share investments... namely the KraneShares Bosera MSCI China A Fund (KBA).
KBA owns the stocks that MSCI's flood of money has to buy. And while it has rallied since June's inclusion announcement, you haven't missed it yet...
KBA has had a good run since June. It's up about 20% (including dividends). But with Qatar and the UAE as a guide, we could see much larger gains in the next few months, before MSCI's initial inclusion.
In short, you haven't missed it... And you really want to own KBA right now.
But what about after MSCI starts including A-shares? What happens then?
Well, based on what happened with Qatar and the UAE, the long-term picture isn't pretty. These two markets fell after the massive run-up in price heading into MSCI inclusion. Take a look...
Adjusted for dividends, Qatar fell 18% in the year after inclusion. The UAE fell 22%.
As investors in Chinese A-shares, you might think this is bad news for us. But our situation is a bit different...
Remember, MSCI is integrating Chinese A-shares into its emerging markets index slowly. It's not happening all at once like it did with Qatar and the UAE.
The first May inclusion should begin a regimented schedule of MSCI adding more and more A-shares. MSCI hasn't shared the full details... But it says the next inclusion date could be as soon as August. So we know it won't be a "one and done" situation.
Multiple inclusions over next few years should prevent the post-inclusion letdown we saw in Qatar and the UAE. It'll mean a more constant flow of money into Chinese A-shares. And that's a fantastic force to have behind our investments in the years to come.
The end result is that Chinese A-shares will make up an enormous portion of the MSCI Emerging Markets Index, around 18%.
We want to own Chinese A-shares heading into this first inclusion. It could cause a major rally in the next few months. And the longer-term picture is bright as well, with a constant flow of money into Chinese A-shares.
KBA is the absolute best way to take advantage of this situation. It has been a top holding our portfolio since we launched. And it's an investment we want to own right now.
Good investing,
Steve Sjuggerud
Editor's note: KBA is a great "one click" way to gain exposure to Chinese stocks. But Steve has found two individual companies whose shares should perform even better. But if you want to make the biggest gains, you have to get in before May 31 at 3:59 p.m. Steve just released an urgent, brand-new presentation detailing this incredible opportunity. Get the details here.