Index provider MSCI's announcement that it will quadruple the weight of China A shares in its indices by increasing the inclusion factor from 5% to 20% has been seen by a number of investors as a greater stepchange than expected.
Here is a selection of the industry reactions thus far.
Greg Kuhnert and Wenchang Ma, co-portfolio managers of the Investec All China Equity Strategy, said: "This decision exceeds market expectations on the pace and size of inclusion. Additionally, FTSE Russell will also start phased inclusion from June 2019, which will see China A shares representing 5.5% of its emerging markets index."
"To put the scale of the MSCI move into context for global investors, A shares currently make up around 0.8% of both the Asia Pacific ex Japan and Emerging Markets indices as well as 0.1% of the broader MSCI All Country World index. Given this latest move, if fully included, China A shares would account for more than 16% of the MSCI Emerging Markets Index and more than 20% of the Russell Emerging Markets Index. China's onshore and offshore markets together will account for over 40% and 50% of the two indices, respectively."
"The MSCI inclusion process continues to constitute a key milestone for both A shares and for investing in China's domestically listed companies, in our view, for several reasons."
"Although more and more investors, both institutional and retail, are considering strategic allocations to China, they remain underweight despite moves to open capital markets and make investing in China easier. Whilst schemes such as Hong Kong-Shanghai Stock Connect have allowed foreign investors to play a more prominent role in the A share market, their participation is still very low. Currently, foreign investors hold just 3% of all A shares, according to a recent survey. In our view, this is highly likely to change in the coming years as global index providers gradually include A shares in regional and global benchmarks."
"Given China's strategic importance, attractive long-term growth potential, increasing index inclusion and diversification benefits, we think global investors' allocation to the world's second-largest equity market will grow over time. Increasing foreign investors' participation should help reduce market volatility and improve pricing discovery in the A share market."
Eric Moffett, portfolio manager of the T. Rowe Price Asian Opportunities Equity fund, said: "We welcome MSCI's decision to increase the China A share inclusion factor in its indices. Foreign institutional investors tend to take a longer-term, more fundamentals-based approach to investing than some sentiment-driven domestic retail investors. As the inclusion factor continues to rise over the long term, foreign institutional investors should have a greater influence on the price of blue-chip A shares."
"This should be a good incentive for local companies to increase the transparency of reporting practices and to adopt strategies that more firmly consider shareholders' interest, as companies with better corporate governance are more likely to be owned by foreign investors. Many companies with good corporate governance practices in the market tend to have a strong foreign institutional investor base, who in general focus more on risk-adjusted returns over the long-term rather than absolute return potential in the short-term."
"MSCI's announcement should translate into some $40bn worth of inflows from active funds, assuming these funds allocate money according to benchmark weight. While incremental, this is still rather small compared with the size of China's domestic stock market, but we are very excited about the opportunity set in this market and its growing relevance to investors outside of Asia."
Michelle Qi, CIO, China, at Eastspring Investments, the Asian arm of Prudential, said: "The decision is largely in line with MSCI's detailed plan but slightly ahead of market expectation: 1) ChiNext Large Caps will also be included with 10% inclusion factor in May 2019; 2) Mid Cap Stocks will be included in Nov 2019 instead of May 2020 as previously proposed."
"For the A share market, the implication is that there will be increasing allocation demand from global asset managers in the next few years. Following the three-step inclusion plan, the pro-forma weight of A shares in MSCI EM index will be increased to 3.3% vs 0.7% previously, leading to an estimated inflow of $70-80bn this year, and an even larger inflow next year."
"The presence of foreign institutional investors in the A share market will be further strengthened. By the end of 2018, according to PBoC statistics, foreign investors' equity holdings stood at RMB1.15trn or 6.7% of A share free-float cap. This scale is already close to the equity AUM of domestic mutual fund, the mainstream local player at A share market."
"Accordingly, we will see stronger pricing power of foreign investors at onshore market. The strong northbound inflows (RMB130bn, 40% of total inflows last year) have been a key driver to the A shares' bull run year-to-date. Foreign investors' investment thesis, research framework and stock pitching preferences have already had, and will continue to have a growing impact on A-share market going forward."
"Compared to H shares/ADRs, A shares provide a more comprehensive sector and company coverage, such as consumer and health care which can benefit from China's long-term trends of demographic shift and structural changes. Apart from this, A shares also have had a lower-correlation with offshore markets than other emerging markets, thus providing a better risk diversification profile."
"In the short term, we see economic and corporate earnings growth to bottom in Q119 and recover in H2. This, along with the MSCI inclusion factor in mid-year, point to some fairly attractive investment opportunities. We look to industry leaders across sectors with solid fundamentals, convincing growth and reasonable valuation to deliver better performances."
"Foreign ownership of A shares remains at low levels - hovering at just under 3% - but foreign ownership has been rising rapidly. Still, only half of Asia ex-Japan funds are currently invested in the asset class and many investors outside Asia still have little or no exposure to the market."
Nicholas Yeo, head of China Equities at Aberdeen Standard Investments, said: "As China's representation in global indices grows, so the number of foreign institutional funds passively tracking these benchmarks will as well. This index-driven money should offer a foil to the retail speculation behind A share trading."
"The entry of more long-term capital to the market will expose local company managements to global standards of accountability and best practice. This will help to raise governance standards over time."
"For now though, MSCI's decision has no practical application for us as stock-pickers. It doesn't affect our view of whether a company is good or bad, nor do we feel any need to adjust our portfolios. We take a long-term view of what has historically been a volatile and momentum-driven retail market."
"There aren't many companies that meet the standards we would expect before we commit our clients' money. We place heavy emphasis on fundamentals such as earnings and valuations and take account of good governance. In other words, we prioritise quality. We have found the best opportunities in consumer-oriented stocks in line to benefit from rising spending by China's growing middle class. Our comfort with A shares will only grow if quality in the market becomes more widespread."
Francois Perrin, portfolio manager at East Capital, said: "It is another step on a decade long journey toward full integration. Following the successful launch of Shanghai and Shenzhen Connect schemes, market opening measures related to daily quota or capital repatriation have been implemented and bear their fruits today."
"This decision is important because by May 2020 when the weight increase would have been fully implemented, the number of Chinese domestic stocks will almost double to reach 450 and represent pro-format 3.4% of MSCI EM Index (on top of China offshore listed names at 31% today), a similar size as Russia (3.8% today) or half of Brazil weight (7.8%). In that process, the largest Chinext names (the equivalent of NASDAQ) will join the index and offer an opportunity to get exposure to the most dynamic and innovative side of the Chinese economy."
"Trading at PE19e 10.4x for 15% EPS growth, Chinese domestic markets offer today an extremely attractive investment proposition and foreign investors have been reassessing their China exposure. Northbound flows have been rising steadily since Nov. 2018 and the pace of inflows has accelerated significantly to reach $20bn year-to-date and we expect the momentum to continue through 1H2019."
"The case for China domestic equities remains extremely convincing even post a +25% gain YTD for MSCI China A (TR, USD). MSCI China A, in line with other domestic Indexes like CSI300 currently trades at a valuation discount above 2 standard deviation over the last 10 years average versus developed markets (S&P currently trading at PE19e 15x for 10% EPS growth)."