A slew of changes to global economies and markets are having far-reaching implications on the Chinese financial sector, according to analysts at Stansberry Research. Many contributors to the trusted financial journal have long been advocates of investors looking to China for investment opportunities and wealth accumulation, but many are now seeing the present as the ideal time to invest. Analysts point to economic reforms and the growth of China’s technology sector as the primary factors making emerging companies uniquely positioned for significant returns on investments. A huge facet of that position lies in the formation of new market indexes that facilitate foreign investment capital by making stocks available to traders like never before.
Through the release of email newsletters, publications, and a new film, these contributors assert that some major news stories – which may have slipped under the radar of casual investors – have those markets primed for explosive growth. To better inform our readers, we’ve taken a look at some of the analyses from the company and its team of financial professionals.
Effect of the MSCI Global Indexer
One of the contributing factors to the optimism regarding Chinese financial markets comes from a decision in 2017 by global index provider MSCI. At that time, the organization announced results from its annual meeting, stating that it would begin to add 222 Chinese A shares, B shares, H shares, red chips, P chips, and foreign listings to its benchmark emerging markets index. This change to the index comes in the wake of Morgan Stanley Capital International’s announcement that it would add Chinese A shares to its own emerging market index. The decision of these two indexes to include those assets reflects the outlook that traders have on growth in the region.
MSCI’s decision was based on expert recommendations following extensive consultations with the firm’s most relied upon international institutional investors. Adjusting the index incorporates 491 Chinese constituents, covering about 85 percent of Chinese equity markets. The revised index represents large cap A shares at just 10 percent of their adjusted market capitalization, signifying room for tremendous growth of those assets. Data from constituents covered by the index would be reviewed on a quarterly basis to convey changes to those underlying equity markets. The aim of this adjustment to MSCI’s global indexer is to cover more relevant information within the Chinese marketplace to aid in identifying new investment opportunities. The change went into effect in June 2018 and has had a significant effect on how a large number of mutual funds and retirement funds allocated their holdings.The reason for the change stems from the way such funds apportion money from investors they serve. This is especially relevant to pension funds in the U.S., of which over 90 percent are earmarked to MSCI indexes. That means that when MSCI adds shares to one of its indexes, large portions of the U.S. population begin to own those shares without even becoming aware of it. As a result of this shift, some experts have predicted that upwards of $1 trillion will flow into Chinese domestic stocks over the coming years, which could cause stock prices to soar and lead to a net growth in wealth for those
Other Effects of Retirement
Though this growth is partly fueled by pension funds, that is not the only way that the implications of a population’s retirement is affecting the growth of Chinese markets. Another consideration is the population in China itself and the particular manner in which it is aging. The larger and older generations in the country are aging and retiring, but the birth rate has declined to the point of younger generations being unable to keep pace. Since the younger population cannot generate enough wealth to support the retirement of older generations, the Chinese government is looking for alternate solutions to create funds to support retirees.
One of the ways this is happening is through the investment of funds into the Chinese stock market. As the population problem becomes more drastic, many predict that the government will need to invest more heavily in the stock market to see gains that are sizable enough to support retirees. This influx of wealth into Chinese markets may very well have a stimulating effect on the country’s financial sector at large and may help investors realize profits as individual stocks and indexes appreciate in value. That unique investment climate is a reason for U.S. traders to look to Chinese markets as a source of substantial returns on investments into the country’s growing technology sector.
Creation of New Exchange
Another topic of interest when it comes to financial markets in China is the Shanghai Stock Exchange’s recent creation of a new stock market exchange – the STAR Market – which opened in June 2019. The exchange, which has been likened to a Chinese version of the Nasdaqby some editors at Stansberry Research, has many people predicting that there could be a subsequent boom after its opening, with prices soaring to unprecedented highs. Parallels have been drawn from other industries that experienced exponential growth of their own when similar situations presented themselves in the past. However, now, unlike then, the climate for foreign investment into these markets is much more accessible. For those who get in early, some experts believe that these changes could represent huge gains for personal portfolios.
The question here, of course, is how exactly the opening of a new stock exchange could present an investment opportunity for those outside of China. It’s no secret that China has become a hotbed of new and emerging technology companies. However, many in the U.S. might be surprised to learn that, though many of these companies are growing quickly, they were previously unable to be publicly traded. The creation of a new exchange, with different listing requirements than existing Chinese exchanges, would create the potential for many of these companies to go public. Once the companies do become public, the chance for U.S. traders to make investments into an entirely new area of the Chinese economy will present itself. This prospect has experts at Stansberry Research including Dr. Steve Sjuggerud, the firm’s chief financial analyst, anticipating a rapid influx of money into the space.
The STAR Market, officially named the Shanghai Stock Exchange Science and Technology Innovation Board, created the opportunity to go public for 25 of China’s most promising technology companies. The newfound availability of these stocks resulted in explosive growth. During the first day of trading alone, each company’s shares reached gains between 84 percent and 400 percent. Due to that success, a cavalcade of new companies have sought listings on the marketplace. Since March, 149 companies have applied for listings on the Start Market, but only 28 have been approved, three of which have yet to launch their initial public offerings. The 25 that have been traded since the market opened have received 37 billion yuan ($5.4 billion) in investment capital, which exceeded experts’ projections by 20 percent. The large injection of investment capital into these newly publicly traded companies demonstrates the abundance of new investment opportunities that the Chinese STAR Market offers traders.
Opening Trade to Sustain Growth
For over 30 years, China’s economy enjoyed decades of robust growth, unparalleled to anything in history. In 2015, the Chinese economy became the largest in the world. Since achieving that feat, China has stayed atop that pedestal for four consecutive years as of the conclusion of the 2018 fiscal year. Its economic output has been estimated to exceed $25 trillion, and its gross domestic product of over $135 trillion represents 19 percent of the world’s total. To put those statistics into perspective, in 2018, the United States generated $20.5 trillion of economic output, while the entirety of the European Union achieved $22 trillion. Those figures make China, the European Union, and the United States the three largest economies in the world, combining for 50 percent of the entire global economy. The schism between those three nations and the rest of the world is stark, as illustrated by the fact that India, the world’s fourth largest economy, generated only $10.4 trillion in comparison.
With the Chinese hegemony over the global economy seemingly relentless, skepticism over why it would allow foreign investment from rival economies share in its wealth has understandably arisen. However, economic analysis sheds light on why that shift has occurred. The primary reason behind the motivation to attract foreign investment is evident upon examination of the rate of the economy’s growth over the last several years.
In 2013, the Chinese economy grew by 7.8 percent. As a basis for comparison, the United States economy grew a mere 1.8 percent during that same period. While nearly eight percent growth in GDP is astounding by any measure, 2013 was the first year that the Chinese economy did not grow by at least eight percent since 1999. From 2000 onward, China’s economy consistently reached over 10 percent in real growth, reaching a whopping 14.2 percent in 2007, its highest rate since 1992 and the second highest in the country’s history. However, a concerning trend emerged in 2013, as the growth of the Chinese economy continually failed to reach its previous heights from that year onward. Growth has diminished significantly every year since 2013, failing to exceed seven percent since 2015. The downward turn in the rate of economic growth has been a watershed moment for the Chinese economy. As such, new measures to expand its economy have been initiated with the passage of new laws and regulations aimed at reinvigorating growth.
In the past, the growth of China’s economy was predicated upon investment into government-owned companies. Facilitating that growth required massive government spending. Even then, the profitability of government-owned enterprises was far less lucrative than that of private industries. The difference in return on investment between those two types of companies is stark, measuring at 4.9 percent versus 13.2 percent. Over time, the debt assumed by the People’s Bank of China to sustain that growth proved unsustainable. With the potential of private enterprise to grow the national economy becoming apparent, lawmakers envisioned that sector as the key to effective reform.
President Xi Jinping’s “Made in China 2025” plan illustrates the new direction of the Chinese economy. The law aims to bolster the development of the nation’s technology industry, setting the framework that led to the advent of the STAR Market. This plan was announced in the wake of $60 billion in new tariffs against the Chinese by the United States as part of an increasingly contentious and ongoing trade war. By facilitating the growth of emerging technology companies, the plan reforms the Chinese economy by making it less reliant upon government spending. Creating investment opportunities is the linchpin of that strategy. This shift is designed to make investment into publicly traded companies the primary catalyst for the country’s sustained economic growth. The measure has been successful in its early stages, with the Chinese technology stock market growing by over $11 billion in a single day on June 1, 2018, due to the influx of foreign investment.
The growth of these burgeoning technology companies has yet to approach its apex. According to Sjuggerud, Chinese A shares are at a mere five percent of their eventual weighting percentage in the MSCI Emerging Markets Index. The addition of STAR Market stocks to the index resulted in another $16 billion of investment in those companies on the first day of trading alone. With at least three more companies set to announce their IPOs on the horizon, the allocation of funds to publicly traded Chinese tech firms is sure to trend upward.
The prospective growth of the price of those shares provides investors with a unique opportunity to make significant returns on their investments. Sjuggerud’s optimism for the potential of those returns lies in those companies offering early-stage venture capital investment opportunities. The unique landscape of the Chinese economy’s plan to attract investment capital to its technology sector creates a situation where investments into companies so early in their development could lead to growth in excess of 100 times the value of their IPOs. Sjuggerud’s analysis points to the Chinese government’s growth targets as the basis for this projection.The centralized economic planning of the Chinese government makes projections on the value of these assets more easily measurable. For instance, China’s biotechnology sector has set its sights on making up four percent of the country’s total economic output. To meet that goal, the sector must achieve 116-fold growth by the year 2020. Opening those companies to foreign investments is a crucial component of achieving the growth needed to reach that target. In doing so, the return on prospective investments into Chinese biotechnology companies is staggering. The potential for huge returns on investments is conveyed by Sjuggerud’s analysis of construction companies formerly backed by the Chinese government in the early 2000s for the same reasons these technology companies are being backed today. Anhui Conch Cement, whose stock was an only HK$0.17 upon its IPO in 2000, stands at HK$47.50 per share today, a whopping 280 times more than its initial value. The prevalence of newly public companies in China’s emerging technology sector offers similar opportunities for investors.
New Film on China
With so much intriguing news taking place in the Chinese financial sector,Sjuggerud felt that there was a need to get more information into the world by utilizing additional avenues beyond Stansberry Research’s periodicals and Daily Watch’s frequent blog posts covering the subject. He saw how his trips to China, along with the trips of colleagues and investors who accompanied him, had significant impacts on their perspectives about the country. From that kernel of an idea came his recently released film “New Money: The Greatest Wealth Creation Event in History.”
The film, which premiered in the auditorium of the New York Stock Exchange, takes a look at the realities in place in China’s financial sector at present and the opportunities for growth that exist there. Over the course of the film, interviews with people directly involved in many aspects of China’s financial story paint an in-depth picture of the burgeoning changes. In accompaniment to the editor’s written work with DailyWealth, Stansberry Research’s investment blog, the film further informs viewers on why he is so bullish on the current investment climate offered by Chinese technology companies.
It’s often difficult for individuals to know what to do with emerging news and trends related to complex topics such as investment in a foreign country. Though many isolated pieces of information have pointed to optimism regarding China’s financial sector, the full story becomes much more complete when analyzing the information featured by Stansberry Research. Sjuggerud’s recent documentary film, along with a range of periodicals written by the editor and his colleagues on Daily Watch and other outlets, is helping subscribers more fully understand this exciting area of financial markets before placing their investment capital into the hands of emerging stock exchanges. With that expert insight, investors can make calculated decisions on which companies are best suited for growth in a sector of the Chinese economy that is sure to redefine the country’s economic outlook for the future.
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