...and fund managers worldwide have to buy...
TUESDAY last week, the largest stock-index provider in the world – MSCI – made a historic announcement, writes Steve Sjuggerud in his Daily Wealth.
It announced a plan to finally include local Chinese A-shares in its benchmark emerging markets index.
This one move will ultimately cause hundreds of billions of Dollars to flow into Chinese stocks in the coming years...
I've written about this story for months. And last Tuesday, I told you the day of reckoning was finally here. I was right...MSCI made the right decision.
I can't overstate the importance of this change. It's absolutely huge. And it will affect just about every investor on the planet – even if they don't realize it.
This is the start of a major shift around the globe. By the time the dust settles, up to $1 trillion could ultimately flow into Chinese stocks...simply because of last week's announcement.
Big investors (like pension funds and hedge funds) look to MSCI for guidance on their holdings. These big investors have "benchmarked" their investments to MSCI's indexes.
Until last week, big investors didn't need to invest in China's local stock markets.
MSCI had said that local Chinese stocks were too difficult for foreign investors to buy and sell. But China's efforts to open up its markets have finally paid off. For the first time ever, MSCI is including local Chinese stocks in its global indexes.
The plan MSCI announced was a little different than we expected. The original plan was to include 400-plus Chinese stocks. But that number shrank...
Instead of including 400-plus stocks, MSCI will include only large-cap and dual-listed stocks (stocks that trade in both Hong Kong and mainland China). This brings the total included to 222.
This is a smaller set of companies than expected. Our opinion is that by focusing on the stocks that are easiest to buy, MSCI was "lowering the bar" to allow China to qualify.
MSCI expects to add the 200-plus companies it left out sometime in the future. For now, here's what the plan looks like...
MSCI plans to move the 222 Chinese stocks it's including to a 0.73% position in its main emerging markets index after market close on May 31, 2018. China does have a few hoops to jump through for that to happen. But they're trivial.
This is just the first move. Ultimately, according to MSCI, the final weighting of local Chinese stocks will be about 18% of the index.
Long story short, this simple announcement could cause up to $1 trillion to flow into Chinese stocks over the next few years. It's absolutely huge news.
MSCI made the right decision. Large investors will be forced to buy Chinese stocks for years – starting in May of 2018. Make sure you get your money there first.