The inclusion of Chinese A-shares into the key emerging markets index looks set to increase foreign investment in China but will not lead to sudden changes for active mutual fund asset allocation.
This appears to be the broad thrust of opinion emanating from the funds industry following the news that MSCI has finally included China’s largest equities in its influential emerging markets index, as reported by Funds Global Asia early this morning.
MSCI said it will add 222 large-cap Chinese A-share stocks to the index beginning in June 2018. The stocks will represent 5% of the A-share market and just 0.73% of the index’s total weight.
Yannan Chenye, head of China equities research and a portfolio manager at Chinese-owned 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.”
More institutional investors are expected to take part in the A-shares market, counterbalancing the retail element and perhaps leading to a change of investment style, said Chenye, that would be characterized by more fundamental-driven investment and would benefit good quality companies.
Detlef Glow, regional head of research at Thomson Reuters Lipper, said although more investors would be attracted to the market over time, investors should not expect mutual funds to cause a large short-term impact.
Of the US$835 billion (€749 billion) in assets under management held by active mutual funds on Lipper’s database, even a 5% allocation of those assets to Chinese A-shares would equate to $41.8 billion and would have “a rather small impact” given the size of the Chinese onshore market, which is around $7 trillion.
“Nevertheless, the inclusion of China will mark a milestone for the credibility of Chinese A-shares and therefore may lead to further development of the Chinese domestic stock market, attracting new international investors and increasing the overall liquidity of the market,” said Glow.
As Funds Global Asia reported, flows from passive funds tracking the MSCI Emerging Markets index would also have no noticeable effect.
East Capital, an emerging markets investor, discussed whether there will be a rally following the decision.
China, which is the second largest market in the world with daily trading volumes swinging between $50 billion and $200 billion, will “hardly notice” the $12 billion of inflows the MSCI decision implies in 12 months’ time, the firm said.
“Obviously, it could trigger a rally in some names that domestic investors perceive as the foreigner-friendly stocks, high quality companies with superior corporate governance standards in promising sectors such as services, healthcare, discretionary consumption,” East Capital said.
However, eligible stocks in the initial MSCI list have outperformed the market since March 23, when the list was released, meaning the event had already been partially priced in, the firm added.
Nevertheless, East Capital said global investors had largely ignored the Chinese onshore markets, but the MSCI inclusion meant the “gravitational importance of China A-shares is confirmed [and] 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”.
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