I’m a little late getting going today… I’d like to say that I’m jet-lagged, but really I’m just email-lagged as I try to dig through the few days of messages that I missed in my brief foray to the Emerald Isle over the past few days (which was fantastic, by the way, thanks for asking).
But going we’ll get, and today the teaser pitch that’s popping to the top of my list is from Steve Sjuggerud, whose name I can finally spell correctly after writing about his various newsletters at Stansberry over the past decade — this particular pitch is for his True Wealth service, which is now offered at $49 “on sale” as one of the “entry level” letters for Stansberry (they say the retail price is $199).
Sjuggerud generally follows a pretty disciplined strategy that most often focuses on ETFs, with the occasional large cap stock making an appearance, and his stated goal is to buy assets that are “cheap, hated and in an uptrend” — which has the benefit of sounding good and logical… though it does not, of course, work every time.
This time out, it’s more of a “special situation” that he’s touting — he says that “The Largest Single-Day Wealth Creation Event of the Decade is Fast Approaching.”
So what is that?
The sexier description from the ad gets the blood chugging through your veins:
“PhD Currency Expert and Former Hedge Fund Manager Says: ‘Mark Down This Date: May 15, 2017’
“The Global Currency Event of the Decade is fast approaching…
“An announcement from one of the most powerful financial authorities in the world is coming in the next few weeks that could lead to returns of up to 871%.”
The short answer is that he’s talking about the inclusion of the Chinese domestic stock market in the major MSCI indices.
Which doesn’t sound all that sexy, but is a potentially meaningful driver of stock prices — though it’s hard to really know for sure, because index adjustments on this scale, adding a giant stock market to global indexes, are not really common.
Most of the time, a change to a big index that is widely followed by passively indexed investment money, like the S&P 500, will have a meaningful impact on the stocks impacted… if a stock is added to the index, for example, the shares will often pop up in the month or two (sometimes it’s a lot faster) that it takes for all of the index funds to buy up enough shares to match the index. Sometimes, as Sjuggerud notes in his teaser pitch, the stocks will even move a few percent just in the day or two around the addition to the index. Passive index money is a huge driver of the markets, and pointing that fire hose of money at a new stock almost always has at least some impact.
It’s not always that simple or easy, of course — active investors and arbitrageurs look for these opportunities all the time, and they hire researchers to dig into the data and try to identify the next company that will be added to the S&P 500 (or whatever other index, though the S&P is the biggest bang for the buck because of the massive pool of money that tracks that US large cap index), so word generally leaks out about expected changes to the index, and folks try to buy up those shares so they can sell them at a slightly higher price to all the index funds, who don’t necessarily have the luxury of waiting to buy shares, in the days leading up to or following the adjustments to or rebalancing of the index.
And on the flip side, the index funds themselves can game the system a little bit — they have a mandate to follow the index, but they don’t necessarily have to follow it slavishly to the day… it wouldn’t be shocking for big managers like Vanguard and Fidelity to start accumulating shares of companies that are almost certain to be added to any given index in the days before the index change is officially announced, and in the days between that announcement and the actual change, particularly because changes tend to happen at the lower end of the index where each individual stock has a relatively small impact (since indexes are market-weighted, adding a new stock at the top, like Apple, would immediately change 4% of the S&P 500, and that would be huge… but what happens more often is that a stock grows into being just big enough to enter the S&P 500, and if a new $4 billion stock like AutoNation (AN) gets added as the 495th largest company in the S&P, for example, that’s only going to drive about one tenth of one percent of that passive money into the new stock… even passive funds generally have some latitude to adjust that tenth of a percent somewhat gradually).
So front-running the index funds is a profitable and legal way to “game” the market, as p plenty of folks have noted (many of the quotes in the ad are from a 2015 Bloomberg article here, if you’d like more background)… but things tend to even out a little bit over time… any predictable pattern in the stock market is jumped on by lots of MIT-trained quants who seek out those little edges, and as more and more folks seek out those small advantages, the advantages tend to disappear. That’s the way of the markets in this over-computerized age, and the lament of the quantitative investor… if your edge is sifting through data and identifying trends or triggers, there’s nothing to stop the next ten supercomputer jockeys from finding that same edge.
Sjuggerud seems quite sure that MSCI will add China A-Shares (stocks which trade in the domestic Chinese exchanges, in Shenzhen and Shanghai, as opposed to those which already have listings in much-more-accessible Hong Kong or other global markets) to the big MSCI Emerging Market index.
That will be a big deal, for sure, because it would add a huge amount of global liquidity to the A-shares markets… though it may also be that MSCI won’t add A-shares to the index unless the cap on foreign trading in those shares is lifted by the Chinese regulators, so it’s kind of a chicken-or-egg situation to that extent. If China makes A-shares more accessible to more investors and loosens their capital controls, there would probably be more liquidity and a boost to Chinese trading with or without Chinese domestic stocks being added to the MSCI Emerging Markets index.
Is it guaranteed that MSCI will include Chinese A shares? No, though it seems inevitable at some point — everyone agrees with MSCI that the market has been “too big to ignore” for years, though plenty of index managers who follow the MSCI Emerging Market index don’t look forward to the headache of dealing with a market that’s not as open as the index’s other components.
Over the past couple of years there have been several points, particularly in 2015 but also just a year ago, in early June of 2016, where investors were convinced that the MSCI index change to incorporate mainland China was imminent, even running up the price of A-shares stocks from time to time in anticipation, and yet it still hasn’t happened.
There have been plenty of articles of folks chiming in about the likely change this year, from negative pieces back in January when the MSCI leaders were chiding China about capital controls, to a Forbes blogger trying to guess at the odds for the “MSCI green light” just last week, but I suppose it hasn’t been in the headlines as much this time around as it was a year ago and two years ago.
I have no particular insight into whether or not it will happen in this next rebalancing, though May-June is the next time period during which a change would most likely be announced if it’s done like past rebalancings… and there will probably be more and more chatter about it over the next two months as pundits dissect the possibilities. The last update I’ve seen from MSCI is last year’s update to their consultation presentation, which basically floated the idea that they might move to a partial inclusion of A-shares in the Emerging Markets index this June as they wait for more flexibility and/or clarity from the Chinese regulators.
If they went forward with that, it would be a much less dramatic impact on the A-shares stocks — but probably still pretty substantial, since A-shares would go from no weight in the trillion-plus dollars that follow the MSCI Emerging Markets index to at least 1% of that index. One percent of a couple trillion dollars is real money, though I don’t know if it’s enough to move those very large markets.
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I guess it’s also possible that something bigger could be announced, particularly since this is a political priority for China as they aim to open up their markets and bring in more foreign direct investment. I’d keep my hopes balanced, I suppose, partly because China remains worried about capital flight from all the local investors who would very much like to get their money out of China, and some of the restrictions China still has in place to prevent that are probably still stumbling blocks for MSCI.
What, then, might an investor do if he wanted to try to front run MSCI on a possible inclusion of the A-shares in the widely-followed Emerging Markets Index? Here’s what Sjuggerud gives us by way of hints:
“… you can take advantage of it with a simple trade on the New York Stock Exchange in less than 10 minutes with less than $30.”
OK, so it’s some kind of easy exchange-traded investment. Probably an ETF. What, then, are we looking at? Any clues? Well, I’ll let you sift through the ad yourself if you like (the version I read was here), but that’s about all I found by way of specifics… which gets us down to a few candidates.
I would assume that he’s pitching one of the most established and liquid of these investments, like the db x-trackers Harvest China ETF (ASHR), which was one of the first of what are now about a dozen ETFs that track the A-shares market (I have some options on that one, myself), but then he gets into some more hints that make it seem like he’s referring to someone else:
“I’ve found the one $30 investment opportunity on the New York Stock Exchange that positions you perfectly on as many of these companies as possible.
“I’m sure you’ve ever heard of this investment before. [I assume he means “never”]
“The small group behind it is probably the foremost authority on Chinese investing in the United States.
“And they have designed the perfect way to legally get in ahead of this announcement.
“My entire research team and I have toured the Manhattan headquarters of this small company, and met with all the members of their senior executive team.
“We even flew to China to meet their ‘boots on the ground’ contacts.
“In my opinion, no one has a better idea of what’s going on in the Chinese markets and exactly how to play it, than this small company.
“I expect this firm and the guys who started it to become Wall Street legends when the China-story explodes.
“They’ll be known as the ones who saw it all coming… and so can you.”
Who could that be? Well, on that front I’m not at all certain, given the paucity of clues. He could be referring to the Morgan Stanley China A Share Fund, which is a closed-end fund that used to be the only way to invest in A-shares, way back in the days before the ASHR ETF and its many competitors hit the market. That might be a bit interesting, it’s trading at a pretty steep discount to NAV (about 16% right now, much larger than the average discount), and, unlike the ETFs, is actively managed to choose the best stocks.
That closed-end fund has beaten the ASHR ETF over the past year and a half, and since the ETF was created almost five years ago, but it also failed to spike as high as the ASHR ETF leading up to that June 2015 MSCI announcement (or crash as hard following the announcement). Maybe an interesting possibility, particularly because they’ll have leverage to the upside if enthusiasm for China A shares help to close the discount, but I can’t tell for sure whether that’s the fund Sjuggerud is recommending.
And if it’s something more esoteric than the Morgan Stanley A Shares fund, well, I haven’t identified it yet — if you have suggestions, feel free to shout them out with a comment below.
But that’s not all Sjuggerud hints at to try to draw you in for a subscription… he also has two other China-focused “special reports” of other recommended ideas. So we’ll try to name those for you, too, and let you think for yourself a bit before pulling out your credit card.
“My team and I analyzed more than 500 Chinese investments, and narrowed it down to just the two most important plays for you to get into your portfolio as quickly as possible.
“These investment opportunities trade right here in the United States.
“They are cheap and easy to buy and sell.
“I believe that these two investments are probably the only places you can find truly safe triple digit gains in China over the long term.
“The first plugs you in to some of the biggest and safest Chinese companies on the market. For example, one of them is a mobile-phone provider with over 800 million subscribers. That’s more than twice the number of people living in America! And history has shown us that when this investment goes up, it goes WAY up. During China’s 2005 bull market, for example, it gained over 300%!”
This could be any of the large-cap China ETFs, but since they’re specifically calling out China Mobile (CHL), and note the performance from a decade ago, it can’t be one of the newer and shinier ones that tries to differentiate slightly from the large cap index of Chinese stocks that are traded in Hong Kong and the US… so here Sjuggerud is very likely referring just to the granddaddy of the China ETFs, the iShares FTSE China 25 Index (FXI).
“The second is a way to get an equity ownership stake in some of the fastest-growing technology stocks on the planet. It’s a brilliant set up. Most people don’t know that Facebook, Google, and Amazon are pretty much banned in China. But the Chinese-equivalents of these companies are some of the most profitable and popular in the world. The have billions of users. And this trade opportunity gives you access to every single top tech company in China right now.”
This one is very likely the KraneShares CSI China Internet ETF (KWEB), which I also mentioned when I looked at Sjuggerud’s China pitch last year (I don’t know if he was touting it then or not, but it’s a logical and easy way to access all those “big China tech” stocks).
“Step #3: Set yourself up to own the future largest company in the world….
“… what I’ve found is probably your LAST chance to cash in on a company that is on track to not only become the largest technology company in the world… but the largest company in the world.
“I’ve been back and forth to China many times in my career… but on my last trip I was truly shocked.
“You see, in just a few years… one company has transformed the Chinese economy…
“As an American venture capitalist said, this company is ‘at every point of your daily contact with the world, from morning until night.’
“The Economist wrote that this company “will change the mobile internet for everyone–those outside China included.”
“Almost no one in America knows of this company.
“And I believe that folks who buy shares of this company now will consider this the best investment of their lifetime.”
That’s Tencent (TCEHY), the gigantic Chinese tech company. Sjuggerud also pitched this one last year, as part of his tease when he promoted “292-C shares” (basically, just recommending that you buy the Chinese versions of dominant global US tech firms). Hard to argue with that one — their WeChat is indeed part of the fabric of daily life in China, and though I’d argue that the regulatory risk is still substantially higher than it is with non-Chinese tech companies… there’s also a protected market, because Chinese tech companies have a huge regulatory leg-up on non-Chinese firms like Facebook and Google in the China market. And Tencent and the others have been navigating the “Great Firewall of China” and Chinese censorship and oversight demands for a decade or more, so it’s not like this is a new concern — and the strong have thrived, with incredible gains over the past decade.
And yes, I’m still a little bitter about Tencent… I sold my shares at a nice 100%+ profit a long, long time ago, and one should never cry over profits taken, but it has risen close to 1,000% since I sold. So maybe I cry a little…
If you’re interested in Tencent and in other emerging internet stocks around the world, in places like India or South America or Russia, take a look at Naspers (NPSNY) as well — another one that I sold long ago that has done well, though nowhere near as well as Tencent, its most well-known investment. I believe Naspers still owns 34% of Tencent, which they bought in 2001 or so for just $34 million that should now be worth about $90 billion, and trades at substantially less than that value despite owning a big ol’ chunk of lots of other dramatically smaller companies in addition to their core businesses in sub-saharan Africa (newspapers and cable TV, mostly, businesses that are not currently all that appealing). Not a recommendation, of course, and Naspers has traded at a big discount to its Tencent stake often over the past five years or so, but I try to glance at Naspers from time to time and it’s looking relatively appealing at the moment. Naspers and Tencent shares track each other pretty closely over short time periods, but over time Tencent has widened a huge lead (over 3 years, for example, Tencent is up 111% and Naspers 66%).
And… that’s all I’ve got for you today, so I’ll pass it back to the great Gumshoe universe — have any thoughts on MSCI inclusion for China, or on the appeal of Chinese investments in general? Let us know with a comment below.
(And if you’ve ever subscribed to Sjuggerud’s True Wealth, please click here to let your fellow investors know what you thought — good ideas? Bad ideas? Worth the money? Worth the time? Your opinion about the experience might help someone else make a good decision. Thank you!)
Disclosure: As noted above, I have a small position in call option contracts on the db x-trackers Harvest China ETF in my portfolio. I do not have direct exposure to any of the other investments noted above, and will not trade in any covered stock for at least three days per Stock Gumshoe’s trading rules.