Managers see benefits to MSCI inclusion of China in EM index

MSCI’s decision to include China in its ubiquitous Emerging Markets index has drawn swift comment from managers about how this represents a watershed moment for EM investors.

In a statement on its latest review decision on the constituents of its indices, MSCI said that as of June 2018 it will include China A Shares in its MSCI EM and MSCI ACWI indices.

“This decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program  and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally.”

“Consequently, MSCI plans to add 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73% of the weight of the MSCI Emerging Markets Index at a 5% partial Inclusion Factor.”

Responding to the announcement, Yannan Chenye, head of China Equities Research, portfolio manager at Harvest Global Investments, said: “Inclusion in the MSCI index family is a strong signal of greater market openness, and it will undoubtedly help the A-Share market to attract broader attention and participation of international investors. This sharp increase in international market participants will substantially change fundamental features of the market.”

“The impact of new market participants might be slight at first, but we expect the impact to be far-ranging in the mid- to long-term;

  • We expect more investors will choose to access local Chinese markets via the stock connects. Inclusion will make A-share markets available to more investors and oversea investors’ interest in China’s stock market will likely increase significantly.
  • A more balanced investor structure with a higher proportion of institutional investors (both domestic and overseas) will likely result in a change of investment style in the A-share market.
  • We expect fundamental-driven investment may gradually gather steam and quality names with innovative business models, solid growth and transparent corporate governance will benefit.
  • At Harvest, we will gradually increase A-shares in our active portfolios. We focus on good-quality growth stocks which are trading at reasonable valuations in A-shares and exhibit good GARP [“growth at reasonable price”] characteristics. We are also interested in investing in those stocks/sectors that are not available on offshore Chinese markets.
  • We believe demand for RQFII ETFs could get a near-term boost due to positive sentiment for A-share markets. We would expect those large-cap stocks accessible via stock connect will benefit most under MSCI’s new proposal of China A-share inclusion.
  • Over the past few years, China’s regulators have been struggling to promote capital market reforms. However, there are enough reasons to believe that with the inclusion of A-Shares in the MSCI EM index, offshore investors could read it as an important step towards China’s path in liberalization and reform, making the market more internationalized down the road.”

Also responding is China Post Global, which offers access to a range of commodity and EM ETFs.

Danny Dolan, managing director, said: “This is a significant and highly symbolic recognition of China’s importance to the global economy, and a big vote of confidence in the Chinese growth story from MSCI and its clients.”

“It’s also worth noting that this is by no means the end of the road for China: the government has already indicated it intends to continue its ambitious programme of market reforms and internationalisation, and this latest development is only likely to increase the pace of new initiatives.

“In particular we’re expecting to hear more on new efforts to provide international investors with direct access to the China A-shares market, following the success of the Shenzhen and Shanghai Stock Connect programmes as well as the implementation this year of Bond Connect and updates on a proposed ETF Connect.

“We see this as the start of a virtuous circle, where over time the number and weighting of Chinese companies represented in the MSCI EM index will gradually increase as international investment grows and large institutional allocations in particular become more commonplace.”

MSCI has stated that it will launch its China A International Large Cap Provisional index on 21 June. This will be followed by other global and regional provisional indices, including the MSCI China and MSCI Emerging Markets Provisional indices by August this year.

The full statement from MSCI on its latest review of its EM index is available here: https://www.msci.com/eqb/pressreleases/archive/2017_Market_Classification_Announcement_Press_Release_FINAL.pdf .

The update also notes views on Saudi Arabia, Argentina and Nigeria, and the outlook for their inclusion or not in the EM index.

 

ABOUT THE AUTHOR
Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 16 years he has been based in London writing about funds and investments . From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope.

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