Morgan Stanley China A Share Fund: A Contrarian Buy Speculation

I heard everyone, famous/infamous or just layman, saying that the Shanghai stock market is a bubble and will crash imminently. Real data also supports the observation that investors are leaving Chinese stocks. Two examples: Forbes reported the leading redeemer in foreign equity was iShares FTSE/Xinhua China 25 Index (FXI) last week, and CAF started the year with a 20% premium but is now traded at a 20% discount. To me, those are contrarian indicators. And of course, contrary to the public opinion, the Shanghai stock market has been very strong. And I believe it is going to move much higher, beyond everyone's imagination.

Why not? The economy is good and earnings are rapidly growing. The market was a bear market almost the entire time before last year. So part of the current price appreciation is just an adjustment of the deeply depressed assets. Now that all the negative news is out, and with increases in interest rates, trading tax, etc, the market should be able to zoom ahead light-weighted. In addition, the money from the recent increase of QFII has not yet been invested.

Looking around the world, it's not difficult to find countries that paralleled the performance of the Chinese stock market. Brazil and India comfortably sit on high levels. And before 1990, how high did Tokyo rise? All these countries have a commonality -- the currency keeps appreciating.

For foreigners there are very limited ways to speculate in Shanghai A shares. The China Fund (CHN) or The Greater China Fund (GCH) has a small percentage invested in A shares. But these funds are not good as they just match the performance of FXI, which has much less risk. Only CAF invests fully in stocks traded in Shanghai. And it has done superbly. As I mentioned above, investors/speculators are leaving CAF, resulting a huge discount. But as long as Shanghai keeps going up, they will come back to buy CAF.

Of course, emerging markets are always high risk.

Disclosure: Author has a long position in CAF

CAF 6-mo chart

Comments

[John Gaats:]

CAF is definitely a long term buy.

2007 May 30 09:54 AM

[Richie:]

Geez,

Bad luck that the Shanghai had to collapse today. So much for their bull running unabated forever, eh what??? Maybe you ought to consider re-posting this article after the anticipated 20% - 25% correction has run its course? Possibly then, you can convince readers you know what you are talking about.

2007 May 30 11:45 AM

[Chimin Sang:]

As the previous article stated it pretty well, CAF does not reflect the NAV due to its limitation, thus it is difficult to use it as a hedge vehicle.

Two kinds of people can play CAF:

- Experts who really know how such close end ETF would behave under two forces: underlying assets and mass speculation. Underlying assets itself is subject to lots of other factors.
- Idiots who just bet on luck.

For the rest of us, it is not something we should get close.

2007 May 30 12:15 PM

[Nidhi Kadalbal:]

India ETF investment analysis at:

<b> nidhishodhane.blogspot.../ </b>

2007 May 30 10:29 PM