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Beginning at 1:55 in this video, Shelley Zhang of China Uncensored (sitting on the left) interviews Perth Tolle, the founder of the Freedom 100 Emerging Markets Index (sitting on the right).
Many investors invest in emerging markets such as China. Based upon comments made in the interview, the advisory firms that investors rely upon use what are called emerging market indices. These indices are weighted toward China to the extent of 35-40%.
Investment recommendations made by these firms are based upon these indices. The first quote below (which extends from 3:22 - 4:15 in the video) explains why personnel at these firms have a job security incentive to follow a particular index published by a company named MSCI.
Considering that most investors aren’t familiar with the internal procedures of advisory firms, it might be said that they’re unwittingly investing money in China.Perth: ... indexes provide the benchmarks for the investment community to follow. (Since MSCI is) the biggest indexer in the world, probably around 90% of the world's institutions and biggest investors (are required) to benchmark to MSCI by (company) policy. If MSCI's emerging markets index has 40% China, then (investment advisors) have to follow that weight ... they're going to have to follow that benchmark, if they don't want to have what's called tracking error … (if you) bet against the benchmark and you have high tracking error, which means (the investment outcome) differs (appreciably) from the benchmark ... then you could, potentially, be held responsible for under performance. So you don't want to underperform the benchmark in any way for job security and other reasons in the investment world.
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Based upon remarks made in video section 7:57 - 9:09, investor funds are still being directed into Chinese securities, despite the ongoing economic turmoil. Not only that, the investment company BlackRock has even publicly advised people to invest in China. The actual comments made in the interview are recorded below.
Shelley: if you're investing your money, that's going into ... one of these ETFs or funds, you're going to be invested in China, no matter what ...
Perth: Correct.
Shelley: That is stunning. Given exactly what's been happening with China in the last few months.
Perth: Absolutely.
Shelley: With Chinese companies ... failing like Luckin Coffee. With Chinese companies, like Evergrande, possibly bringing the entire real estate market to the brink of collapse in China. MSCI, FTSE ... are still saying, 'Our hands are tied.'
Perth: Yes. So MSCI CEO has come out and said, 'We don't tell people how to invest.' And iShares, which is BlackRock, which tracks MSCI indices, they have come out and spoken very favorably toward China and also have now told investors to triple their China exposure. So they're saying, at this time, after all of this has happened in China, recently in their market, after destruction of capital has happened on the biggest scale we've seen in recent years, you should now triple your China exposure.
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