Morgan Stanley China A Share Fund: A Contrarian Buy Speculation

| About: Morgan Stanley (CAF)
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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 (NYSEARCA: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 (NYSE:CHN) or The Greater China Fund (NYSE: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

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