Investors in funds that track MSCI indexes will soon have more exposure to Shanghai: SSE Composite Index (.SSEC) stocks and a brutal totalitarian regime
Global index provider MSCI recently announced it would quadruple the percentage of China A shares—shares of companies that trade on mainland exchanges like Shanghai and Shenzhen and were previously available only to Chinese investors—in its China, global and emerging market indexes by November 2019.
By then, A shares will have what MSCI calls a 20% “inclusion factor” in its indexes, from 5% now. Even that won’t amount to much right away—roughly 3% of its emerging markets index and less than 1% of its global MSCI All Countries World Index ACWI, -0.26%
But once some technical and access issues are worked out with Chinese authorities, MSCI wants to ramp up exposure to the world’s second-largest stock market until China A shares and stocks traded in Hong Kong and Taiwan comprise more than 50% of the MSCI EM index. The MSCI ACWI (which includes the U.S.) would also show a big increase in its total China weighting from its current 3.75%.
This could ultimately have a big impact on investors. (Competitor FTSE Russell also is increasing exposure to China A shares to more than 5% of the FTSE Emerging Markets Index by March 2020.) The iShares Emerging Markets Index ETF EEM, -0.72% tracks the MSCI index, while the Vanguard Emerging Markets Index ETF VWO, -0.72% the largest emerging markets ETF, and the Vanguard FTSE all-World ex-US ETF VEU, -0.22% follow FTSE indexes. So if you’re a global ETF investor, chances are that within a few years, you’ll own a lot more Chinese stocks, whether you want to or not.
Craig Feldman, managing director and global head of index management research at MSCI, told me in an interview that the decision was made after “extensive global consultation” with the firm’s big institutional clients, who, he said, had an “overwhelmingly positive experience” with MSCI’s first expansion of its Chinese holdings last year.
MSCI’s goal, he said, is to create indexes that “make the widest representation…of the market opportunity of China for the international investor.” He sees the firm as a “facilitator of the feedback we get from market participants.” Translation: Wall Street and big institutions are driving this locomotive, and MSCI and FTSE are in the caboose.
The biggest issue, said Feldman, was Chinese stock markets’ lack of accessibility. But negotiations with regulators have opened markets up over the years. “There’s been a strong commitment by Chinese regulators to improve accessibility,” he told me. I get the sense that’s the only thing that really matters to either Wall Street or the index providers.
Never mind that China’s wickedly volatile market is dominated by unsophisticated individuals who regard investing as a form of gambling. They are generally winning this year: the Shanghai Composite Index SHCOMP, -4.40% is up 19.1% this year through Friday. And never mind that the Chinese government frequently steps in to prop up share prices or take the wind out of the market’s sails.
And never mind that the A-Share market is dominated by big state-owned enterprises (SOEs) like Sinopec 0338, -2.20% 600688, -3.74% SHI, -1.27% , PetroChina 601857, -3.53% 0857, -1.95% PTR, -1.07% , and Industrial & Commercial Bank of China 601398, -2.95% 1398, -3.13% , which are controlled by the Chinese government. Communist Party members even have seats on the boards of directors not only of SOEs but of technology leaders like Tencent 0700, -2.31% TCEHY, -1.84% , Baidu BIDU, -1.25% and Alibaba BABA, -1.29% .
But what’s especially striking about this big move is its timing—just as trade tensions between the U.S. and China are high and countries are leery of working with Chinese companies like Huawei Technologies for fear of espionage. And as the Financial Times reported, “Beijing has largely abandoned a list of promised economic liberalization issued four years ago, opting instead for greater control by the party and state over the economy and civil society.”
As President Xi consolidates power—he’s effectively become president for life—China is developing the most technologically advanced surveillance state the world has ever seen. Video cameras track every movement and the secret police or party apparatchiks give every Chinese a “citizen score” which rates how pro- or antisocial they are. Throw in face recognition technology and artificial intelligence and you could have a society that makes Orwell’s 1984 look like a libertarian Utopia.
Finally, in Xinjiang human rights groups estimate the Chinese government has put up to one million Uighur Muslims in “re-education” camps where they are reportedly tortured, have their beards cut, and are even forced to eat pork and drink alcohol, both forbidden by Islam.
This may not matter much to Wall Street and money managers desperate to grab at what may be their last big opportunity, nor to the index providers (Feldman told me it simply wasn’t a focus of the discussions). But it does matter to many investors, especially younger investors who care about the social and environmental impact of their investments. UBS estimates MSCI’s expansions would drive inflows of $67 billion into Chinese markets this year.
Right now, Chinese exposure is minimal in most global and emerging market indexes. But as emerging market funds become China funds, I’d recommend combining a broad developed-market international ETF like iShares Core MSCI EAFE IEFA, -0.03% with a 5%-10% position in a small-cap U.S. growth ETF like iShares S&P Small Cap 600 Growth IJT, -0.04% Since 2004, it has smoked both th iShares MSCI Emerging Markets ETF and the S&P 500 SPX, -0.21% . It gives you all the rapid growth you’ll need without the currency issues or political headaches of emerging markets—and your money will not finance the rise of Big Brother across the Pacific.
Overall, the bias in prices is: Upwards.
Note: this chart shows extraordinary price action to the upside.
By the way, prices are vulnerable to a correction towards 2,806.14.
The projected upper bound is: 3,092.83.
The projected lower bound is: 2,863.70.
The projected closing price is: 2,978.27.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 7 white candles and 3 black candles for a net of 4 white candles. During the past 50 bars, there have been 32 white candles and 18 black candles for a net of 14 white candles.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 65.2358. This is not an overbought or oversold reading. The last signal was a sell 0 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 62.91. This is not a topping or bottoming area. However, the RSI just crossed below 70 from a topping formation. This is a bearish sign. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 0 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 47. This is not a topping or bottoming area. The last signal was a sell 0 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 39 period(s) ago.
Rex Takasugi – TD Profile
SSE COMPOSITE closed down -136.557 at 2,969.861. Volume was 185% above average (trending) and Bollinger Bands were 163% wider than normal.
Open High Low Close Volume___
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 3,005.18 2,675.83 2,749.94
Volatility: 45 26 26
Volume: 49,316,569,088 23,314,812,928 16,307,903,488
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
SSE COMPOSITE is currently 8.0% above its 200-period moving average and is in an upward trend. Volatility is extremely high when compared to the average volatility over the last 10 periods. There is a good possibility that volatility will decrease and prices will stabilize in the near term. Our volume indicators reflect moderate flows of volume into .SSEC (mildly bullish). Our trend forecasting oscillators are currently bullish on .SSEC and have had this outlook for the last 33 periods. our momentum oscillator has set a new 14-period low while the security price has not. This is a bearish divergence.