Global index provider MSCI announced on Tuesday that it would include 222 Chinese A-shares, stocks dominated in yuan and listed in either Shanghai or Shenzhen, into the MSCI Emerging Markets (EM) Index and the MSCI ACWI (All Country World Index) Index beginning in June 2018.
Those stocks, most of which are already trading on the restricted stock connect trading link between mainland China and Hong Kong, would account for just 0.73% of the overall MSCI market initially. But that weighting may grow if China continues to open its stock market.
The move will create $17.4 billion worth of demand for Chinese stocks from global investors who track the MSCI indicies, according to MSCI.
FinanceAsia and its sister titles Corporate Treasurer and AsianInvestor have collected comments from across Asia about the impact of the inclusion.
Wang Qi, former head of China equity research, MSCI, and chief executive officer, MegaTrust Investment (HK)
“The existing MSCI China Index is simply insufficient without the A-shares.”
“It is lacking in several key sectors such as consumer staples, consumer discretionary and healthcare. The non-A-share market is also kind of stagnant, while the A-share market is expanding rapidly at a rate of some 500 IPOs each year. So if you like to own quality companies in China, the next Tencent (700.HK) or Alibaba (BABA) will likely come out of A-shares as opposed to Hong Kong or other markets.”
Ashley Alder, chief executive officer, Hong Kong Securities and Futures Commission
"The inclusion of A shares in the MSCI Emerging Markets Index signifies the growing importance of the A-share market to international investors, and will further strengthen Hong Kong’s role as the gateway to access the mainland stock market under the existing Stock Connect programme."
Hong Hao, head of research and strategy, Bocom International
“A shares can be inscrutable, with a different trading environment that international fund managers will find it hard to adapt to. Over time, inclusion will likely lower A-shares’ valuation to the international level. The global trade leading indicator has peaked, portending moderating growth ahead. While the inclusion bodes well for large-cap blue chips, slowing growth suggests allocations towards these stocks, with or without the inclusion.”
Luke Richdale, client portfolio manager for emerging market Asia-Pacific equities at JP Morgan Asset Management
"MSCI’s decision to include a small number of A-share companies is a landmark for China’s equity market. Whilst initial inflows will surely be limited, the decision effectively means investment houses will need to dedicate research efforts to mainland China in a significant way.
"Since the start of 2016 we’ve added four research analysts and two new portfolio managers on our Greater China team, growing the dedicated team to 10 people, and we intend to continue hiring. We aim to cover more than 300 stocks across the Chinese equity market in the next two to three years."
Equity research team, Credit Suisse
“We expect the stocks preferred by overseas investors (such as QFIIs and RQFIIs) to also be chased by domestic investors and show good performance when expectations for the MSCI A-share inclusion increase again, thanks to the positive market sentiment.”
“Active investors may seek opportunities in Consumer, IT, and Health care sectors. Stocks in these three sectors have been favourites of overseas investors (by way of QFII and Connect) over the past years. Many quality stocks in these sectors are very competitive compared with their global peers.”
Rakesh Patel, Asia-Pacific head of equities, HSBC
“The decision to include A-shares in the MSCI Emerging Markets Index will, in the long-term, have far-reaching implications for global equity investors… For global investors, the decision to be zero weighted in China, which has typically been the default position, is no longer an easy one to make. We expect initial inflows will gather momentum and grow to be substantial over time.”
John Sin, head of asset servicing, Greater China, BNY Mellon
“China’s inclusion to MSCI’s Emerging Market Index symbolises the continuation of China's inevitable rise and increased relevance within global portfolios. While the short and longer term impact will have to be monitored, investors will be cognisant that China’s weighting and influence continues to increase.”
China equity strategy team, Morgan Stanley
“Overall, we view this announcement as an important milestone in the integration of China’s equity markets with the rest of the world, but that there is unlikely to be a significantly positive impact on A share index performance near term (due to the low inclusion factor and implementation period). Our Shanghai Composite target price remains 3,700 (+18%). However, at the margin the announcement of the inclusion of dual-listed A / H shares in the MSCI indices may hasten a decline in the AH premium which currently stands at 22.5%.”
Stephen Tu, vice-president and senior analyst, Moody’s
“In addition to institutional capital benchmarked off of MSCI EM indices, several large exchange-traded funds that track the MSCI EM index will be affected by MSCI's decision to add A-shares, including the $32 billion iShares MSCI Emerging Markets ETF and the USD32.4 billion iShares Core MSCI Emerging Markets ETF. To align their portfolios with MSCI's updated index constitution, these funds will also have to buy A-shares.”
“We expect ongoing regulatory liberalisation in China’s onshore market to lead to a full index inclusion of A-shares in the next few years, with an estimate of a 20% weight within the MSCI EM Index. Full inclusion is key for China to attract fund inflows, which would benefit the various asset managers mentioned above, spur renminbi internationalisation, and bolster investor confidence.”
UBS analysts
“The inclusion could be a positive surprise for some investors and should provide a near-term boost to A-share sentiment. Most investors thought an inclusion was unlikely, given MSCI's concerns over trading suspensions and capital mobility and the impasse between MSCI and the Chinese government over the strict data pre-approval requirements. China's recent regulatory tightening on the A-share market – such as the restriction on major shareholder selling and the slowdown of the IPO approval process – also left questions on whether Chinese regulators are keen to loosen their grip on the onshore equity market.”
Tim Condon, head of Asia research, ING
“After significantly underperforming the rest of Asia in the previous three months, the Shanghai Composite is up 0.7% month-to-date. Some of the reversal of fortune may be a re-pricing for the MSCI news, in which case we would expect a sell-on-the-news effect to kick in from today. However, some also may be a re-pricing for what the China Securities Journal described as a ‘general feeling in the market’ that the central bank had become more willing to extend liquidity, in which case we think the rally will continue.”
Bill Maldonado, Asia Pacific chief investment officer, HSBC Global Asset Management
“As the global economy shifts from West to East and China continues to progress its RMB internationalisation agenda, more international investors will recognise the immense investment opportunities China offers and gradually start getting and increasing exposure to the country in their diversified portfolios. The Chinese equity market offers unique opportunities across sectors including technology and “new economy” stocks which we believe are key growth contributors to our Chinese equity portfolios.”
Marco Montanari, Asia Pacific head of passive asset management, Deutsche Asset Management
"At the moment, only less than 0.5% of the European and US ETF markets are invested in China-related ETFs, which is extremely low and we believe these percentages will increase."
"Using Japan as a proxy, the exposure of European and US investors to Japan is between 5% and 10% of their ETF portfolio. As China is a bigger economy than Japan, we expect that in the next five years, China could get close to the same kind of exposure in US and European portfolios, so between 5%-10%. In dollar terms, as the European and US ETF markets together stand at about $3.5 trillion, the increase in percentage should bring about $200 billion to $300 billion inflows across equities and fixed income ETFs, also considering the general growth of global ETF markets."
Nick Beecroft, portfolio specialist, Asian equity, T. Rowe Price
“The initial impact [of MSCI’s decision to include China A-shares] on the composition of regional and global indices will be extremely modest. However, over the long term, assuming further liberalisation and regulatory reform of the mainland stock markets, the depth of China’s A-share market could mean China gains substantial weight within those broader indices.”
Karine Hirn, partner, East Capital
“Global investors have largely ignored the Chinese onshore markets… It will take a few years but at the end of the process, China A-shares might represent as much as 20% of the MSCI EM index. MSCI indices are tracked by around USD 1.5 trillion in assets under management. Investors and asset allocators need to speed up the development of their research capabilities and infrastructure operations (trading, custodians, lawyers etc.) to adequately handle the world’s second largest equity market.”
Raymond Ma, portfolio manager, Fidelity International
“Regardless whether green light is given to A-share inclusion in this round of review, I have been investing in A-shares long before the proposals of A-share inclusion. The A-share exposure of my two funds has been expanding over the years in light of the improved fundamentals and liquidity of A-share markets over the recent years. I will continue to focus on A-share companies with strong growth prospects and cash flow generating capability.”
Kevin Anderson, head of investments in Asia Pacific, State Street Global Advisors
“Over the next 14 months, portfolios will need to be rebalanced to match the new weighting, and some institutions have already begun to re-allocate in anticipation of the change.”
“With China continuing to pursue its reform agenda, and the domestic market now too big to ignore, China’s ultimate aim of full inclusion should be the focus. China A-shares are estimated to grow to as much as 15% of the EM Index market cap, yet the timeframe for that remains uncertain. Today, the first step for many EM investors is deciding how to use the MSCI EM Index to access this new opportunity — whether through a pooled fund or directly via Stock Connect. At this point, managers with long-term experience in the region should be best equipped to help investors review their options for accessing the growth potential of China.”
Tommy Ong, head of wealth management solutions, treasury and markets, Greater China at DBS Bank
"After A-shares' inclusion, there will be more derivative and index products in the market. That’s good news for treasurers.
"We treasurers will have more balanced views of renminbi. Most treasurers have a quite bearish view of renminbi regarless of the movement of the US dollar. By adding A-shares to MSCI, treasurers should have more confidence in renminbi. I hope that Chinese government bonds will be included in global benchmarks soon. That will further help renminbi stabilisation."
Ju Wang, senior FX strategist, HSBC
“This positive sentiment impact, alongside China’s FX policy bias for near-term currency strength, should help cap US$-RMB in the current environment of broad USD appreciation.”
“The longer-term implications for the RMB are probably the most significant. The MSCI inclusion and relevant reforms by China should pave the way for $500 billion of foreign equity inflows over the next five-ten years, according to HSBC Equity Research Foreign portfolio investors should eventually have more influence on the direction of the RMB, deepening and broadening the onshore FX market thereby helping the exchange rate to become more flexible.”
