Buying a Dollar for 84 Cents

Things are getting out of whack for one of China's major stock funds.

Get this... You can buy a basket of Chinese stocks for just 84 cents on the dollar. That's a massive 16% discount to the true value of these companies.

It's possible because, well, no one wants to invest in China. And it's setting up a big opportunity for investors who are willing to step up and buy.

You might wonder how this is possible at all – and more important, how you can take advantage of it. I'll explain everything in today's DailyWealth...

Buying a dollar for 84 cents is a no-brainer. It's about as obvious as an investment can get. And somehow, it's possible right now.

You see, when investors give up on an asset, they lose all rationality. They often become unwilling to buy, even at a big discount.

That's what's happening with the Morgan Stanley China A Share Fund (CAF) right now. Investors have fled this fund, which holds mainland Chinese stocks. And that selling pressure has pushed the fund well below the true value of its assets.

This discount is possible thanks to CAF's structure. It's a closed-end fund. Unlike exchange-traded funds, closed-end funds can't create or liquidate shares based on demand. Instead, they trade at a premium or discount to the true value of their assets.

When the fund is in hot demand, it will trade for a premium. But when investors want nothing to do with Chinese stocks, like today, CAF trades at a discount.

Today, it isn't just a few pennies cheaper than normal... The fund recently traded at its largest discount to its net asset value in four years. And it's 16% below its true value as I write. Check it out...

It's rare to see CAF trade at such a steep discount. We've only seen it happen a few times over the last decade. But in those cases, big returns were in the making.

In 2015, CAF traded at a 32% discount to liquidation value. That didn't last long, though... As investors started to pile back in, this discount closed.

In fact, CAF's discount shrank to less than 5% by mid-2017. Over that time, the fund rallied 72%.

We saw another example of this back in 2011. CAF fell to a 15% discount in late December of that year.

That was enough to pique investor interest. The fund soared to a 13% premium by January 2013. CAF rallied 59% over that same period.

This is what's possible when CAF's discount starts to close. And it tells us we could see huge upside in the coming months.

This is a truly rare situation. We can buy a dollar's worth of assets for just 84 cents. But to do it, you've got to invest in China, one of the world's most hated markets right now.

I know that won't be for everyone. But if you can stomach it, history says it'll likely pay off.

Good investing,

Chris Igou

Further Reading

China was one of the hardest-hit countries in the coronavirus pandemic. But the virus also set off never-before-seen innovations. And that means one of China's most important markets could be a winner in the wake of this crisis... Read more here: The Unexpected Winner of Today's Coronavirus Outbreak.

"Whatever you think about China, this isn't an investment trend to ignore," Brian Tycangco writes. Even with a slowing economy, China has continued to defy the naysayers. Thanks to technology, its massive population is driving demand in several key markets... Learn more here.

Market Notes
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