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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