MSCI to Add China A Shares in Emerging-Markets Index
MSCI to Add China A Shares in Emerging-Markets Index
By Detlef Glow
21 June, 2017, 07:07
Australian shares will now face more competition for overseas interest following the decision by the MSCI index group to include some big Chinese stocks in its key emerging markets index.
However, South Korea's stock market may experience an outflow in the short term as Chinese stocks entry into MSCI index, the world's most influential compiler of share indexes, would attract funds from investors around the world.
That initial small weighting is tipped to increase over time and Anderson, SSGA's head of investments, Asia-Pacific, says China A-shares are estimated to increase to as much as 15 per cent of the index from an initial 0.5 per cent. The move will pressure markets, especially those with exposure to China, such as Australia, but the gradualness of the move should prevent any wild swings.
"Defining moment for investors looms as MSCI rules on China".
"This decision has broad support from global 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", MSCI said in a statement.
A renewed slump in oil prices to seven-month lows put Asian investors on edge on Wednesday, overshadowing a decision by USA index provider MSCI to add mainland Chinese stocks to one of its popular benchmarks.
While the CSI300 has lagged a global stock rally so far this year, it had surged almost 8 percent since mid-May, partly on expectations of the MSCI decision. The main argument is the sheer size of the mainland China market: north of $6 trillion in the combined Shenzhen and Shanghai indices.
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This year's proposal included 169 stocks - rather than the 448 stocks in previous years - which are highly liquid with a large cap and have never been suspended for trading for more than 50 days within the past 12 months. MSCI's decision has been closely-watched as a sign of China's growing importance on worldwide financial markets.
Until now, it's been an easy decision for global fund managers to avoid Chinese shares but it's now more of a bet if they decide not to invest. These "Stock Connect" links give foreign investors wider access to the mainland's markets, which are mostly restricted to local investors.
In the past the, MSCI has thrown down the gauntlet to Beijing to ensure it ends up doing what it said it would do make China's financial markets more palatable.
In currency markets, the flight from oil benefited the USA dollar - the two often move inversely.
Reservations remain over pre-approvals and technical issues related to Stock Connect, including the timely execution of trades and settlement, as well as a segregated accounts model that remains out of line with global standards. It now only includes shares of Chinese companies listed in Hong Kong or the US. "The securities within the MSCIChina A International Index have been excluded from broader indices due to the lack of access and regulatory concerns".
David Semple, portfolio manager for the VanEck Emerging Markets Equity strategy, said that "in our view, the exclusion of China A shares in prior years was simply postponing the inevitable".
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