SINGAPORE - Fund managers welcomed index compiler MSCI's move on Thursday (Feb 28) to increase the weighting of Chinese-listed stocks (A-shares) in its benchmark indices and adding more of such companies in the process, which they say will deepen investment opportunities for global investors.
The move is expected to lift global acceptance of Chinese equities markets, which have generally been viewed by investors as volatile. Beijing's influence on the markets, poor corporate governance standards and restricted access to these stocks by foreign investors were also concerns.
But China has been taking steps to modernise and open its capital markets, which MSCI said was a key factor in its decision.
Noting that A-shares had become "too big to ignore", the US-based MSCI added 236 China-listed large-cap stocks to its Emerging Markets Index (MSCI EM Index) in 2018. In a statement, MSCI said that it would quadruple those shares' weighting in three stages by November 2019.
The index compiler will also add 168 new mid-caps in November and 27 stocks from the Shenzhen Stock Exchange's ChiNext, the mainland's equivalent of Wall Street's tech-heavy Nasdaq. This may offer opportunities to gain exposure to the most dynamic and innovative side of the Chinese economy.
While the A-share profile remains small (currently 0.71 per cent of the index), Chinese companies listed overseas make up just over 30 per cent of the index with examples being tech giants, Hong Kong-listed Tencent and US-listed Alibaba.
By the time the weight increases have been fully implemented in May 2020, China A-shares on the MSCI EM Index will stand at 450 and represent about 3.3 per cent of the MSCI EM Index. This would be similar to the index's weight on Russia (currently at 3.8 per cent) and under half of the weighting of Brazil-listed entities (currently at 7.8 per cent).
As at 10.37am, the FTSE China A50 Index was up 70.89 points or 0.6 per cent to 12586.30. For the year, the index is up 21.2 per cent.
Meanwhile, the MSCI China Index was down HK$0.60 to HK$82.01. For the year, it is up 15.18 per cent.
Here are some reactions from experts:
Geraldine Buckingham, Blackrock chair and head of Asia-Pacific:
"We are pleased with today's announcement and believe our clients will benefit from the increased representation of China A-shares in global indexes. As a fiduciary, BlackRock continues to support and welcome ongoing progress in facilitating broader investors' participation in China's onshore capital markets."
Manish Mehta, Blackrock global head of markets & investments for ishares and index investing:
"BlackRock welcomes MSCI's decision to further increase China A-shares' weighting in its indexes. The gradual addition of onshore Chinese securities deepens the investment opportunity for global investors, and we look forward to continued development in the market and regulatory environment to facilitate this increased access."
Jeffrey Halley, Oanda senior market analyst:
"It will be interesting to watch the reaction by Chinese stocks today as MSCI announced overnight they will be increasing their weighting in the MSCI market index to 3.3 per cent throughout 2019. Selected China mid-cap stocks will also join, which has surprised markets expecting a heavyweights-only bout."
Francois Perrin, East Capital portfolio manager:
"We welcome the decision made by MSCI to further increase the weight of China A-shares in the MSCI Index series. It is another step on a decade-long journey toward full integration. Following the successful launch of Shanghai and Shenzhen Connect schemes, market opening measures related to daily quota or capital repatriation have been implemented and bear their fruits today.
"In that process, the largest Chinext names will join the index and offer an opportunity to get exposure to the most dynamic and innovative side of the Chinese economy.
"Northbound flows have been rising steadily since November 2018 and the pace of inflows has accelerated significantly to reach US$20 billion year to date and we expect the momentum to continue through the first half of 2019."
Eric Moffett, portfolio manager for T Rowe Price's Asia Opportunities equity strategy:
"We welcome MSCI's decision to increase the China A-share inclusion factor in its indices. Foreign institutional investors tend to take a longer-term, more fundamentals-based approach to investing than some sentiment-driven domestic retail investors. As the inclusion factor continues to rise over the long term, foreign institutional investors should have a greater influence on the price of bluechip A-shares.
"This should be a good incentive for local companies to increase the transparency of their reporting practices and to adopt strategies that more firmly consider shareholders' interest, as companies with better corporate governance are more likely to be owned by foreign investors. Many companies with good corporate governance practices in the market tend to have a strong foreign institutional investor base, who in general focus more on risk-adjusted returns over the long term rather than absolute return potential in the short term."