MSCI CEO Dismisses Investor Concern Chinese Stocks Are “Uninvestable”

MSCI CEO Dismisses Investor Concern Chinese Stocks Are “Uninvestable”

While US hedge funds were decimated by the sudden selloff of Chinese stocks triggered by China’s regulatory crackdown that halved the average China ADR, such as Alibaba, Tencent, and JD.com, some have suggested the unpredictability in Chinese stocks makes them “uninvestable.” 

Disputing those claims is MSCI Inc. Chairman and Chief Executive Officer Henry Fernandez, who disagrees with concerns about the “investability” of Chinese stocks following Beijing’s regulatory crackdown, citing a trend of “every three, four, five years” a regulatory compliance wave smash stocks lower but very quickly afterward rebound.

In fact, Fernandez told Bloomberg Television’s Haidi Lun and Shery Ahn in an interview on Monday that after the regulatory compliance, the market tends to bottom out and stocks go to “new heights.”

Many investors, such as US hedge funds, are saying Chinese stocks are “uninvestable” for them because their analysts have difficulty in pricing or discounting regulatory risk and volatility. A Goldman Sachs note from last week points to underperformance by US hedge funds due in part to hundreds of billions of market value wiped out in China stocks in a matter of months due to regulatory pressures by Beijing. 

“One-third of hedge funds in our analysis held a China ADR in their long portfolio at the start of 3Q, contributing to the recent headwinds against hedge fund returns,” Goldman’s note said. The bank examined 813 hedge funds with $3 trillion in gross equity positions at the start of July.

Fernandez said many emerging markets had once been considered uninvestable because of government actions. He lists India and Mexico were markets that were once regarded as uninvestable. 

“We have to look at this process that the Chinese regulators are going through in the prism of the last 10 years and also across other markets in the world,” he said.

The regulatory crackdown sent the Hang Seng Index into a bear market last week, sliding more than 20% from its February high on Friday after Beijing approved a new privacy law to prevent data collection by domestic technology companies.

MSCI China Index has plunged 30% since its February peak. 

NASDAQ Golden Dragon China Index has been more than halved this year. 

“There is a lot of criticism on China in terms of lack of compliance,” and the country is now going through a corrective phase, Fernandez said. “Countries go through periods like this.” 

Watch Fernandez’s interview here: 

Gabriela Santos, a global market strategist at JPMorgan Chase’s asset management unit, also objects to the view that China stocks are uninvestable. 

“We had this in 2018, 2015 and 2011 and it’s unrelated to the economic cycle — it’s related to China’s regulatory and reform campaigns,” Santos told Bloomberg Television on Saturday. “It takes time to rebuild confidence, but three months out Chinese equities tend to trend up.” 

Meanwhile, the SEC quietly shut down the processing of any new Chinese IPOs and warned investors about buying Chinese stocks. 

Tyler Durden
Tue, 08/24/2021 – 09:18

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