MSCI quadruples China A-shares exposure
Phased inclusion
MSCI is to quadruple the amount of China A-shares in its major benchmarks to 20% in 2019, a year after the initial inclusion of Chinese onshore stocks.
The index provider had planned to gradually increase the number of A-shares in its World, Asia Pacific ex Japan and Emerging Markets after introducing 233 large-cap stocks in 2018.
A-shares currently make up around 0.8% of 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.
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.
MSCI launches 12 China indices in preparation for A-shares inclusion
Wider reach
After both inclusions, China's onshore and offshore markets together will account for over 40% and 50% of the two indices, respectively, according to Investec Asset Management's Greg Kuhnert and Wenchang Ma, co-Portfolio Managers of the All China Equity Strategy.
"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.
"While 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."
'A foil to speculation'
Nicholas Yeo, Head of China Equities at Aberdeen Standard Investments, added: "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 stockpickers. 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."
He added: "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."
