Three Reasons to Invest in This Odds-Defying Market Today

Three reasons to invest in this odds-defying market today... A trip down (Wall Street) memory lane... A new law with earth-shattering implications... Our 'MSCI inclusion story' is far from over... Starting tomorrow, the big boys are coming to play...

Editor's note: Today, we want to introduce Digest readers to one of our newest analysts...

Brian Tycangco is the lead Asia-based analyst on Dr. Steve Sjuggerud's research team. He spends most of his days uncovering the latest opportunities for Steve's True Wealth Opportunities: China newsletter, and he also contributes to the free DailyWealth e-letter.

Brian officially joined Steve's team last year. And he came with decades of experience...

After entering the investment industry in 1995, Brian has worked as a stock broker at a large Asian trading house and as an equities analyst for a major European investment bank.

He has met with leading CEOs in every industry in Asia... and knows all the ins and outs of making money in the region. In other words, he's the perfect right-hand man for Steve.

In today's Digest, Brian details how China's stock market is performing so far this year... explains how a new law in the country could be like going back to Wall Street in 1934... and notes that another important piece of the China investing puzzle will take effect tomorrow...

You might not believe what I (Brian Tycangco) am about to tell you, but it's true...

China is the world's best-performing major stock market this year.

The talking heads have been silent about this for the most part. But 2020 has so far been a fine time to be invested in China. And this market has defied the odds in a big way...

A trade war with the U.S., a slowing economy, and the deadly COVID-19 pandemic. It's a trifecta of cataclysms that simply doesn't happen... except it just played out in China.

And yet, here's the thing... not a single major stock market in the world has performed better and more remarkably than China through the first quarter of this year.

Since the end of 2019, every major stock market is down. And while China hasn't escaped that fate, it has performed better than anywhere else. The chart below shows it...

Despite bouncing back some over the past week, U.S. stocks have fallen since February... The S&P 500 Index is down 18% for the year. The Dow Jones Industrial Average completed its worst first quarter in history.

Elsewhere, Japan has struggled (down 15%). The MSCI World Index – which represents more than 1,600 stocks in 23 developed markets – is also in bad shape... It's down 20%. And Europe has suffered the most (down 27%).

So what's going on? Is what's happening in China's stock market an anomaly? Everyone knows there's a deadly virus spreading around the world and shutting down large swathes of the global economy. And it started in China. So this has got to be a mistake, right?

It's not... These numbers are as authentic as they get.

It's understandable to be skeptical, though. After all, when it's raining extremely hard where you live, it's difficult to picture the sun shining brightly anywhere else. Misery loves company.

But when it comes to COVID-19, we've seen a lot of improvement in China...

On March 18, the country didn't report any new domestic cases for the first time since the outbreak started. The rate of deaths has slowed significantly in recent weeks, too.

In the province of Hubei, ground zero for the virus, the number of cases has dropped to essentially zero. And Chinese authorities recently lifted the travel restrictions in and out of the region.

In other words, right now, China is where the U.S. hopes to be by June.

And the reality is that Chinese stocks are doing better than anyone would imagine. Plus, even better for the long term, the Chinese market has legs... very powerful ones, too.

It all comes down to what I'm about to tell you next...

First, let's take a trip down (Wall Street) memory lane...

The chart below shows the Dow Jones Industrial Average from its inception in 1896 up until the U.S. Securities and Exchange Commission ("SEC") was created in 1934...

In 38 years, the index doubled. That's an annual return of about 1.8%, on average. It doesn't inspire much confidence... especially given the risk you were taking.

But then, Congress passed the Securities Exchange Act of 1934... This wide-ranging legislation, in part, created the SEC to enforce federal securities laws. Not many of us stop to think about it, but that changed the ballgame for the U.S. stock market. Here's why...

The creation of the SEC finally meant there was a sheriff in town to lay down the law. This new sheriff protected investors and upheld laws against things like price manipulation and insider trading, which played a big part in the 1929 stock market crash.

In short, it restored confidence in the markets... Most rational Americans wouldn't be comfortable keeping the bulk of their retirement savings in the stock market if laws against accounting fraud and insider trading didn't exist.

Despite its faults and shortcomings, the SEC's ability to enforce laws that protect smaller investors is a big reason why more than 100 million Americans keep money in the stock market. It has allowed tens of trillions of dollars to flow into the markets over the years...

And guess what? The same thing is happening in China today... and it has the potential to grow its stock market many hundreds of percent over the coming years.

You see, on March 1, China just instituted a revised securities law with earth-shattering implications...

For the first time ever, small investors can file class-action lawsuits against listed companies.

Apart from confiscation of illegal proceeds, the law also increased the penalty against violators by as much as 66 times... as much as 20 million yuan (roughly $2.9 million in U.S. dollars).

You might think China – the world's most populous country – would already have these kinds of laws in place protecting investors. But that hasn't been the case...

China's modern-day stock market is only 30 years old. Meanwhile, the China Securities Regulatory Commission ("CSRC") – the country's version of the SEC – was founded in October 1992. And for the most part, the CSRC was supervisory in nature. But now, this new law gives the CSRC much sharper teeth when it comes to penalizing erring market participants.

Until the revised law came along, China's stock market – the Shanghai Stock Exchange Composite Index – had been operating much like Wall Street did before 1934. In other words, it's like a casino...

The Shanghai Composite saw a quick bump in its first year. But in the next 28 years, even with a couple of spikes along the way, it rose just 4% per year. That's nothing like the growth we've seen in the U.S. following the creation of the SEC.

Investors were wary of privately owned firms. New stocks would soar incredibly at the beginning after their initial public offerings ("IPOs")... only to crash and burn, leaving unwitting investors holding the bag for years without recourse.

It's a big reason why most Chinese investors have a short-term mentality. They would almost always choose to dump shares of IPOs soon after listing and then move on to the next hot IPO. Without investor protection, long-term investing was out of the question.

This is the kind of situation that prevents listed companies from attracting a strong investor base. They simply can't grow their market capitalizations.

So that's why this new law that just went into effect has earth-shattering implications...

It's like going back in time to when the Securities Exchange Act of 1934 was enacted, transforming Wall Street from an unruly, dangerous market into the massive wealth-creating machine that it is today. And it's happening at this very moment in China.

This change builds on another important reality for China – our 'MSCI inclusion story' is far from over...

For years now, my colleague and True Wealth Opportunities: China editor Dr. Steve Sjuggerud has been telling you about the big changes going on in China's stock market.

Like the new securities law, these changes are transformational. They literally have the power to attract hundreds of billions – if not trillions – of dollars into China's relatively small markets.

One of those changes happened last year, when global index provider MSCI quadrupled the weighting of Chinese-listed stocks on its major indexes. This simple change alone is expected to attract $600 billion in foreign money into China's stock market over 10 years.

But even after that last increase, China's inclusion factor in the MSCI indexes is still very low at just 20% of its eventual weight. This means China still has the potential to increase its weighting in the MSCI indexes by a factor of 5.

If that full inclusion were to happen, the weighting of "A-shares" – shares of companies listed in China and priced in yuan – in the MSCI Emerging Markets Index, for instance, would soar from its current 3.3% up to 16.2%.

The MSCI has increased the A-shares weighting in its indexes for the past two years. And now that China has laid down new rules to protect investors, the next increase could be right around the corner.

It's the kind of situation most investors only dream of... being able to legally front-run one of the biggest stock market booms in modern history.

There's another major story happening, too. The big boys are coming to play...

Starting April 1 – tomorrow – China is scrapping foreign ownership limits on mutual fund companies. By the end of the year, the same will be done for securities companies.

This is another important piece in the puzzle... a major cog in the machine that turns China's once dreary stock market into a global wealth-generating powerhouse like Wall Street.

Financial powerhouses such as UBS (UBS), HSBC (HSBC), JPMorgan Chase (JPM), Nomura (NMR), Citigroup (C), Morgan Stanley (MS), Credit Suisse (CS), and Goldman Sachs (GS) have already made a beeline to apply for 100% ownership of their respective China businesses.

These firms already manage trillions of dollars in assets. They're as reputable as they come.

They also employ the greatest talents in the industry – market professionals who are largely responsible for some of the most popular investments in the stock market today.

It's hard to quantify the exact impact of having the world's biggest investment banks penetrate wealth-management in China the way they have in the U.S. But consider this...

China's households have $63.8 trillion in total wealth, while the entire market capitalization of listed companies in both Shenzhen and Shanghai exchanges totals just $7.7 trillion.

If even a mere 10% of that difference flowed into the Chinese stock market, it would be enough to buy the entire free float of all listed stocks more than twice over.

That could be several hundred billion dollars flowing into the market every single year... for a very, very long time.

These are just a few reasons – albeit big ones – why I'm expecting Chinese stocks to be one of the brightest performers in the next five to 10 years.

While the global COVID-19 pandemic and the trade war are challenges that China must face today, they're both short-term issues. Tomorrow's challenges will be different.

If we look to the long term, things are changing in China. And they're changing for the better. I urge you to get your money there first... before the rest of the crowd joins in.

New 52-week highs (as of 3/30/20): Polymetal International (POLY.L) and iShares 1-3 Year Treasury Bond Fund (SHY).

In today's mailbag, feedback on yesterday's Digest about the cost of COVID-19... more suggestions for Porter's baby "GOATs"... and compliments for Ten Stock Trader editor Greg Diamond. As always, send your comments to feedback@stansberryresearch.com.

"So now J&J (of which I own a number of shares) has a promise of $1 Billion for a 'candidate' vaccine – which doesn't even go into trials until 3Q20 – months after a number of other trials start. If this isn't a classic example of Crony Capitalism, aka Socialism, I'm not sure what is. I'll let Dave Lashmet weigh in on the chances of this reaching the market before others closer to their trial dates.

"We the taxpayers are betting on a company, that according to the Digest is 'not a major vaccine maker' $1 billion – why? JNJ certainly has enough cash to do this on its own, but if the teat of Uncle Sam is available I'm certain CEO Alex Gorsky thought 'why not' and reached out his corporate hand for alms.

"I wonder if we the taxpayer will profit from this gift as we did with a number of the TARP bailouts? Maybe some warrants on JNJ. We did very nicely on the PNC ones." – Stansberry Alliance member Chris R.

"As the old saying goes, 'Proper prevention prevents poor performance' is what you wrote...

I have always remembered it as the 7 P's – "Proper prior planning prevents piss-poor performance." If only our government would follow this tenet." – Stansberry Alliance member Gerald S.

Corey McLaughlin comment: I went with the "safe for kids" version of the "Ps to live by," but point taken.

"Dear Porter, I want to thank you for all the top-notch research you provide. I feel lucky to have run across the communication from you that sounded so convincing to me that I was willing to buy your services. I'm 80 years old and struggle with internet processes that are second nature to my 10 grandchildren. But now I'm comfortable with trading online!

"My first investments were in a regular stock account as my IRA was invested for me. I bought Apple before the split and was impressed by the resulting gain. I didn't think I could do it again but did buy Microsoft. Then I invested in Stansberry!

"One of your early advice that I remember was investing 10% in gold stocks, which I did. Over the years I added other metals until I have over 10% in one and 20% in the other. This has really stabilized my bottom line when the markets fell. I've been adding to the forever stocks I have and will add more now. This gives me the freedom to be distracted, which I often am. I do feel this year will see great strides in 5G and biotech so I'm investing in both. I'm very optimistic for the future and have kept most of my stocks.

"As for declining companies, both my father and my husband's father worked for G.E. and a brother in law was a VP. I gave my inherited stocks to my 4 children. Two sold and two kept the stock. What a difference one decision made. Your early info on G.E. Stock was right on, and I trust your research on Berkshire Hathaway. Thanks for that too." – Paid-up subscriber Peggy M.

"Thanks to Mike K. for suggesting KIDS for up-and-coming GOATS. We know GOATS is an acronym for 'Greatest Of All Time,' so how about for KIDS we use 'Knockouts In Development'? Does that sorta' work?" – Stansberry Alliance member Jackson G.

"Porter, I suggest 'Mini-me' GOATS." – Paid-up subscriber Chris F.

"Mr. Diamond, just discovered your Master Series on Technical Analysis. Thank you for putting this together. Technical analysis is fascinating!

"Have not had enough time to really dig in but think your beginning video is a great start." – Stansberry Alliance member Oren W.

McLaughlin comment: We're glad to hear it, Oren. As a reminder to all Digest readers, we recently "unlocked" Greg's Ten Stock Trader analysis (not his trade recommendations, though)... You can access Greg's intraday updates on the publication's archives page right here or along the right side of our StansberryResearch.com homepage.

Good investing,

Brian Tycangco
Manila, Philippines
March 31, 2020