The Chinese Economy Vs. The Chinese Stock Market
I was watching a recent interview with a famous hedge fund manager recently where he essentially said you have to be invested in the Chinese stock market because that is where the economic growth is taking place at a rapid pace. We certainly all have the feeling that rapid growth = higher stock returns. So, lets put that to the test, shall we?
There is a thing called the MSCI China index which has been around since at least 1992. It has a wonderful website which I encourage you to visit, go look them up! According to the website, “The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 730 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.”
So if rapid growth = higher stock returns, what would you guess the annualized return would be on the MSCI China index measured in US dollars since 1992? Should be way over 10%, right? Maybe 15 or 20? Well, the website very conveniently tells you what the annualized return is……A whopping 2.2%. Yep, thats it, just 2.2%! Compare that to the MSCI Emerging Markets index which over the same time span returned 7.75%.
I don’t know how to explain this or why it is, but facts are facts. While China’s economy has no doubt been a world beater, it’s stock market has been a dud. Anyone have any ideas why?
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Duskerdawn : Erm... I think you should also consider looking at the main index - hang seng index as well as Shanghai composite index before you make your conclusion...
KongWeePeh : China stock is heavily regulated. Shanghai was once 5000 in 2015. Then a heavy reform drop to 3460in the same year.
iceswimmer OP Duskerdawn : thanks for the tip, I will do a comparison
iceswimmer OP KongWeePeh : Although some of the major companies got listed in HK or US, many of them are building their business in China, so they got to be affected by the gov's policy, which makes it very difficult for a foreign investor.
GoldenGold : The stock market is rising and the economy is going down. The economy is going up and the stock market is going down, which is also a common trend...