Index provider MSCI announced early this morning Hong Kong time that it would include 222 Chinese A-shares, stocks dominated in renminbi and listed in either Shanghai or Shenzhen, into the MSCI Emerging Markets Index and the MSCI All Country World Index, starting in June 2018.
Those stocks, most of which are already trading on the restricted Stock Connect trading link between 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.
The unusual decision by MSCI to make concessions on the criteria of admission to its benchmarks meant it was more of a "symbolic" move for the time being, said fund managers.
MSCI has also reclassified Pakistan as an emerging market rather than a frontier market and launched a consultation on whether to include Saudi Arabia in its emerging markets indexes. It will announce a decision on the latter in June next year.
Wang Qi, former head of China equity research at MSCI and chief executive of 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.”
Toh Hung Bin, senior research analyst for equities at Bank of Singapore:
“Initial market impact is small due to low initial inclusion factor, reflecting limited free float and foreign ownership limits. Market estimates range from $2-3 billion for passive inflows and potentially another $10-12 billion from active rebalancing inflows, though this could be smaller if investors already have some existing A-shares position or choose not to follow the recommended weights.
“Compared to A-shares 2017 average daily trading turnover of $65 billion, the combined flows are not material. Longer-term, upon 100% inclusion, overall China (including HK-listed shares and ADRs) could account up to 34% of the EM index.”
Ashley Alder, chief executive of Hong Kong's 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 at 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:
“Whilst initial inflows [into A shares as a result of MSCI’s decision] 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 healthcare 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 at 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.”
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 A-H premium, which currently stands at 22.5%.”
Stephen Tu, vice-president and senior analyst at 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 $32.4 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.”
“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 at 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 at 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 at Deutsche Asset Management
"At the moment, 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 for Asian equity at 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 at 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 $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 at Fidelity International
“Regardless [of] whether green light [was] 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, Asia-Pacific head of investments at 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.”
Tommy Ong, head of wealth management solutions, treasury and markets for 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 at HSBC
“This positive sentiment impact, alongside China’s FX policy bias for near-term currency strength, should help cap USD-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 to 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.”
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