Even as Chinese stocks falter and falling oil prices spur worries of global economic instability, the Yale Investments Office may have little cause for concern.
China’s stock market has plummeted in recent months and the yuan has steadily declined in value, triggering fears that China’s economy may trigger the next world economic crisis. Although Yale’s investment portfolio allocates around 9 percent of the University’s endowment toward emerging foreign markets, Yale economists and endowment-management experts said a crisis in China’s economy would have a negligible impact on the Yale endowment. They added that economic concerns overseas may be overblown — the result of unfounded anxiety and public speculation rather than careful analysis of China’s economy. In a Jan. 21 interview with Bloomberg News, Yale economics professor and Nobel laureate Robert Shiller said that China’s stocks have little impact on America’s financial health, and urged economists and the media to resist “overhyping” China’s influence on U.S. markets. Although Shiller did not specifically speak about the University’s endowment during the interview, Yale professors and experts said his insights would also apply to the University’s investments.
William Jarvis ’77, managing director of the Commonfund Institute, an institutional investment firm, said that because a portion of Yale’s investments in China are illiquid, they do not need to be sold immediately and thus, if China’s stocks were to fall, “the effect is going to be relatively negligible” on Yale’s endowment.
“The whole strategy of the Yale endowment is to stay away from liquid markets,” Jarvis said.
The crisis in China’s stock markets began when the Chinese government tried to encourage average consumers to invest in the stock market. The Chinese wanted their economy to look more like America’s, Jarvis said. Stocks, particularly those in the Shanghai stock exchange, initially gained value, but have slumped recently, causing global speculation and sparking a flurry of conversation in financial circles about the safety of China’s usually strong economy.
But Yale does not have to worry, at least for now. The University is safe from a decline in stock values on the Shanghai exchange, Jarvis said, because those Chinese stocks are not eligible for investment by foreign investors — the stock market is closed to outsiders and open only to Chinese investors.
To be sure, a small number of companies have multiple listings, traded both in Shanghai and in other markets, but those companies are not numerous enough to impact the broader market.
“The market turmoil itself will have a hard time having a transmission mechanism to get from China to this country,” Jarvis said.
Yale economics lecturer Michael Pascutti expressed a similar view on China. He said that a drop in China’s stock market would have a minor impact on Yale’s endowment because so little of it is actually invested in Chinese stocks.
Another reason Yale should not worry about overseas markets is that, according to Jarvis, the U.S. economy is relatively self-contained. A crash in overseas stocks might hurt emerging markets, but it could ultimately benefit American companies.
Pascutti acknowledged that emerging markets like China have “gotten killed” recently, despite their strength in previous years. This might be cause for concern, but as Pascutti pointed out, much of Yale’s exposure to Chinese stocks is through U.S.-based companies that invest overseas, which protects it from any serious fluctuations in China’s market.
Still, changes in the Chinese economy are only part of Yale’s broader investment picture overseas. Indeed, Jarvis said China’s economy is old news compared to other emerging markets in countries like Nigeria or South Africa, where he guessed that Yale might be investing in many smaller “frontier markets.” Yale does not disclose how much it has invested in a stock at any given time, so there is no way of knowing precisely where the University has its money.
Part of Yale’s endowment model purposefully prevents Yale from making fast, spur-of-the-moment decisions. For example, Yale’s endowment investment committee decides asset allocations once a year. However, Yale does have methods of selling and buying stocks regularly throughout the year, in a “rebalancing” process that could foreseeably react more quickly in case of a crisis overseas, Jarvis said.
The real problem is not that China could damage U.S. stocks, but that instability abroad could induce “sympathetic selling” on Wall Street as a result of purely psychological anxieties over the falling stocks, Jarvis said.
Similarly, Shiller described the lack of investor confidence to Bloomberg News as a “psychological phenomenon” brought about by investors picking and choosing facts to make their investment decisions.
In the end, Yale has the responsibility of any investor to protect itself from unstable stocks and to find ways to minimize risk, Jarvis said.
“Any investor understands not only why they’re getting into an investment, but how and why they want to get out of it,” Jarvis said. “There is a constant dynamism to that process.”
The Shanghai Composite Index — a stock index of all stocks traded on the Shanghai exchange — has fallen 2,414 points from its high of 5,166 in June 2015.