Why Adding China To The MSCI Indices Could Be A Disaster (In 1 Simple Chart)

Chinese stocks are around 4 times more volatile than the current MSCI World index... in other words, if asset allocators maintain current equity weightings then portfolio risks will soar (if China is added). But given that most risk budgets are fixed, rising volatility in the equity portion of portfolios (from adding China) will require rotation out of equities and into bonds (or lower vol assets) in order to maintain VaR limits.

Be careful what you wish for...

In English - Adding China to MSCI is like adding a powder keg of volatility into an illiquid global correlation nest.

Charts: Bloomberg

Comments

[HedgeAccordingly]

they should just learn a bit from the US of A..

A $12.5 Trillion Manipulation: The US Treasury Market

http://hedgeaccordingly.com/2015/06/a-12-5-trillion-manipulation-the-us-treasury-market-tlt-tbt.html

[green sheen]

Depends how you define disaster. Bibi Netanyahu...

https://www.youtube.com/watch?v=twRDQmmxLkw

[kaiserhoff]

Rigged markets have consequences.

[hawaiian waverider]

Not just VaR models, which are used internally and for prop money which is smaller than retail by far, but many allocations are based on a target level of vol that when exceeded will cause rotation out of that violating asset class/ETF etc.

[demsco]

Lol, wow, MSCI  is a wrighted index.. Are you saying Brazil, India are less volatile than China? Please. I love reading you guys, but your rarely right. Bottom libe, China us the Second largest economy so to exclude it from indexes is ridiculous. It isnt an emerging market either, its the second largest economy. Yup, i own China so i guess im bias, but i also know your chart is full of shit. You cant show a weighted index to an unweighted index to show how "volatike" it is.

[xerxiesx]

Your analysis completely misses the point of portfolio risk and diversification.  Of course a single country index is more volatilie than a global diversied index.  Why don't you compare the volatility to other single country markets included in the global diversified index?  Why don't you also use the Shanghai composite, which is less volatilie than the Shenzen index, overstating the volatility of the A-Shares market.  Lastely, the addition could actually be diversifying to the global diversified index if the correlation is low enough.  What the A-Shares contribution will be to index volatility depends on the correlation between the two.  Very naive analysis, I'm dissappointed in Zero Hedge.