Steve Sjuggerud's DailyWealth Premium

Why $6.2 Billion Will Flow Into Alibaba – From Just Two Buyers

By Dr. Steve Sjuggerud

Monday, September 11, 2017

My friend Brendan Ahern at KraneShares sometimes describes himself as an "index nerd."

While you and I might read through the football scores over the weekend, Brendan will be reading the latest 100-page changes in index methodologies from the big stock-index providers.

It's incredibly dry reading. But Brendan discovers some extraordinary stuff in there...

His latest discovery is what's about to happen to what he calls China's "index orphans." And it could mean billions of dollars are about to flow into a handful of Chinese stocks in the coming months.

Let me explain...

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An index orphan is a huge company that isn't part of a benchmark index yet. When it gets adopted by a major index, a ton of money flows into the stock.

It's a technical point – but it means real money. Chinese tech giant Alibaba (BABA) is a great example.

Alibaba is the sixth-largest company in the world by market value, with a market cap of more than $400 billion. (It's the largest non-U.S. public company in the world.)

But as Brendan explained to me recently, Alibaba is missing from some of the major indexes.

It trades in the U.S. But it isn't a part of the U.S. benchmark S&P 500 Index because it isn't a U.S. company.

So where does it belong?

The world's second-largest index provider has the answer...

FTSE Russell currently doesn't include U.S.-listed Chinese companies in its China indexes. But that's about to change.

According to Brendan, FTSE Russell is about to include companies like Alibaba in its China indexes, its emerging markets indexes, and its global indexes.

This is a big deal...

As Brendan explained to me, the largest emerging markets exchange-traded fund – the Vanguard FTSE Emerging Markets Fund (VWO) – has about $80 billion in assets. Its largest holding is Tencent (TCEHY), with roughly $3.5 billion worth of Tencent shares (a weighting of almost 4.5%).

"Because Alibaba is roughly the same size as Tencent, the Vanguard index fund ought to have to buy roughly the same amount as Tencent," Brendan explained.

If he's right, that's $3.5 billion that will have to flow into Alibaba – all because of one buyer.

But it's not just the Vanguard FTSE Emerging Markets Fund...

The Vanguard Total International Stock Fund (VXUS) is almost FOUR TIMES the size of VWO – with roughly $300 billion in assets. Tencent is one of the top five holdings in this fund. This fund holds about $2.7 billion of Tencent. Therefore, Brendan says this fund will have to buy about $2.7 billion worth of Alibaba.

That's $6.2 billion that will have to flow into Alibaba – in just two funds.

The story is much bigger here, too...

Longtime DailyWealth readers know I've written a lot about MSCI's recent decision to include local Chinese stocks in its benchmark emerging markets index. That will mean hundreds of billions of dollars flowing into China's local stock market.

I expect more and more of these index inclusions over the next few years. That means more and more money will flow into China. And that's one big reason why I remain bullish on Chinese stocks over the long term.

Make sure you have your money there first.

Good investing,

Steve

P.S. I just released a brief video presentation explaining how you can buy shares of Tencent at a huge discount. If you're interested, you must act quickly. Get the details here.

Further Reading:

Steve has been keeping close tabs on the story in China for years. In May, he explained why Chinese stocks were an "asymmetric" trade. Two months later, he shared his "boots on the ground" experience from his most recent visit to Beijing. Last month, he shared a quiet tailwind for Chinese stocks. And three weeks ago, he explained why an entire portfolio of Chinese stocks was up 42% in 2017.

But while the story in China is mostly positive, one area of its market hasn't participated in the rally. As Brett Eversole explains, "China isn't a 'buy anything' market." Get the story here: One Spot to Avoid in China's Stock Market Boom.

NEW HIGHS OF NOTE LAST WEEK

Cigna (CI)... health insurance

UnitedHealth (UNH)... health insurance

Biogen (BIIB)... pharmaceuticals

Bristol-Myers Squibb (BMY)... pharmaceuticals

AbbVie (ABBV)... prescription drugs

Abbott Laboratories (ABT)... Similac, Pedialyte, Ensure

Mastercard (MA)... credit cards

Visa (V)... credit cards

Shopify (SHOP)... e-commerce winner

LendingTree (TREE)... Internet peer-to-peer lending

GoDaddy (GDDY)... Internet domain names

eBay (EBAY)... Internet auctions

Match (MTCH)... Internet dating

Grubhub (GRUB)... on-demand food delivery

CarMax (KMX)... used cars

Ferrari (RACE)... fast cars

Swift Transportation (SWFT)... trucking

U.S. Concrete (USCR)... concrete

Mohawk Industries (MHK)... world's largest flooring maker

Lumber Liquidators (LL)... hardwood and laminate flooring

Align Technology (ALGN)... Invisalign

Estée Lauder (EL)... makeup, skin care, fragrances

Procter & Gamble (PG)... the everyday goods in your house

VF Corporation (VFC)... the everyday clothes in your closet

Madison Square Garden (MSG)... sports and entertainment

Take-Two Interactive (TTWO)... video games

Southern Copper (SCCO)... copper

Franco-Nevada (FNV)... precious metals royalties

Royal Gold (RGLD)... precious metals royalties

NEW LOWS OF NOTE LAST WEEK

American Outdoor Brands (AOBC)... guns

Sturm, Ruger (RGR)... guns

Harley-Davidson (HOG)... motorcycles

Mattel (MAT)... toys

Viacom (VIAB)... the death of traditional television

$800 billion will likely flow into Chinese bonds...

Despite its massive size and growth, China's bond market was completely left out of global bond indexes at the beginning of 2017. We can't know exactly when this will happen, but it's a wrong that will be righted...

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