The investing year 2019 has had an explosive start. February continued as well as January. The HCP Quant fund rose by 2.34% over the month. The benchmark index MSCI ACWI SMID Value Total Return returned 3.00% in euros. The US S&P 500 Total Return popped 3.83% in euros and Europe’s S&P Europe 350 Total Return index gained 4.11%.
At the end of last year, China’s stock market dipped strongly. Now the direction has been the opposite. At the turn of the year, I wrote about China-related threat scenarios and the possibility of a surprisingly strong and quick “relief rally.” Now the threat of a trade war has faded as a result of successful negotiations. I think China has everything it takes to surprise markets in 2019.
Another positive piece of news supporting Chinese markets is MSCI’s decision to quadruple the weighting of Chinese A shares in MSCI’s indices. Large-cap companies’ weighting will increase from 5% to 20% in three steps in May, August, and November. Considering the HCP Quant fund, even more significant than this is MSCI’s decision to add mid-cap companies in November with a weighting of 20%. These changes are estimated to bring 80 billion dollars of new capital to Chinese stock markets. If China continues liberalizing its markets, MSCI will also continue increasing the weighting of Chinese companies in its indices after this.
MSCI is not the only index provider with changes coming with respect to China. FTSE Russell has decided to include small-cap, mid-cap, and large-cap Chinese A shares in its indices. The addition will occur in three steps in June 2019, September 2019, and March 2020. Further information can be found in FTSE’s FAQ documentation.
Dow Jones Indices are following in the footsteps of MSCI and FTSE Russell. S&P has decided to include over a thousand Chinese A stocks in its indices in September.
Why do these matter? MSCI, FTSE ja S&P are large index providers. Countless passive funds and ETFs track their indices. As a result of these index changes, the funds tracking these indices buy Chinese shares in a corresponding ratio. The growing popularity of index investing will drive capital to Chinese markets helped by these changes. The year 2019 looks very interesting in this light. Much better than in a long time.
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HCP Quant portfolio manager
“The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.”
– George Soros
(This text is a translation of the Finnish-language HCP Quant investor letter.)