Matt Hougan's article on Morgan Stanley's closed-end China fund only tells half the story on whether or not domestic Chinese equities are truly overpriced.
Matt points out that as a closed-end fund, Morgan Stanley China A-Share Fund (NYSEArca: CAF) currently trades at a premium. In addition, the Shanghai-listed Chinese A-shares that the fund invests in also trade at a premium, compared with equivalent shares listed abroad. Add it together and CAF ends up being 18 percent more expensive than a basket of similar Chinese company shares listed in Hong Kong or
In other words, you are paying nearly a fifth extra for the hope that other international investors will, over time, attempt to flock to
For Matt, that’s too high a price for what seems like an outright gamble. There are few who would disagree.
The A-share premium ultimately works like initial repayments in a Ponzi scheme. If
But that might not happen for a long, long time. And in the meantime, the premium depends on what price investors in the domestic markets are willing to pay each other. As such, that’s the way I think you have to judge any investment in CAF.
I don’t think it’s very useful to use a year-to-date, or even 12-month, time horizon for CAF. This was a period of dynamic readjustment in global equity prices, where markets were more or less insularly focused.
Instead, mark the time horizon for the fund back five years, and compare the results with other China-related ETFs. When you do that, you can see that CAF easily beats competing ETFs such as GXC and FXI in terms of percentage-point gains.
Indeed, up until the beginning of the market fallout in late 2007, CAF was more than three times ahead of these two.
This was a period when
Placing a bet on CAF then is not just placing a bet on
As banks become better capitalized again, and if
So if you think loose global monetary policy will end up channeling much of today’s greenbacks eastward, CAF could well present a viable investment opportunity right now.