Many investors are underestimating the impact of the expected inclusion of China A-shares in global emerging-market benchmarks and may be caught off guard when it happens, say industry observers. This is despite the move by US fund giant Vanguard to steadily incorporate mainland stocks into its EM exposure.
For one thing, the recent equity market turmoil in China has led some to change their expectations on the timing of any potential index changes, said Wang Qi, a partner at Shanghai-based MegaTrust Investments.
Following the government intervention in the mainland stock market in the summer, many investors assume that the expected inclusion in index provider MSCI’s benchmarks is now “in the distant future”, he noted.
Some believe the intervention will have negatively affected the inclusion decision, said Wang. “However, if you look into the details of the review process, this is not a major concern for the index providers.”
Two things need to happen for A-shares to be included, he noted: “The Chinese authorities need to continue lowering the hurdles for foreign access, and global investors need to reset their expectations on the nuisances of investing in China.”
Certainly, Vanguard has not changed its plans as a result of mainland market turmoil. The world’s second biggest asset manager began buying A-shares last month, and on November 2 its EM stock index fund and exchange-traded funds started to track an interim FTSE emerging-market index that includes A-shares.
Vanguard’s EM stock index fund – the world’s largest, with $50 billion in assets – has started to track the FTSE Emerging Markets All Cap China A Inclusion Transition Index as in interim benchmark. The fund will ultimately have a 5.8% allocation to A-shares, reflecting the weighting of the FTSE benchmark, indicating that it will invest some $2.9 billion in A-shares during the transition.
The moves follow the firm’s announcement in June that it would start buying A-shares in the fourth quarter. As a passive investor, it will gradually increase its exposure over the coming 11 months, rather than considering current valuations.
Other big asset managers have not indicated they are tracking the FTSE interim benchmarks or otherwise systematically boosting A-share exposure in their EM portfolios.
Vanguard is making its own allocation to A-shares through the Rmb10 billion ($1.6 billion) quotas held by its Australian business under the renminbi qualified foreign institutional investor scheme. It is reportedly planning to apply for the second batch of RQFII quota.