Global equity investors wanting greater Chinese stock exposure without taking on active management strategies have reason to celebrate MSCI's latest tweak to benchmark indexes. Yet the move also creates some losers.
"With China being added to the investible list of indexes, tracking funds will have to rebalance their holdings to accommodate this, which could result in an overhang for other indexes in the region," said head of Asian research Justin Tang at United First Partners, a firm specialising in event-driven analysis.
MSCI will lift China-listed stocks in its Emerging Markets Index to 3.3 per cent by November, from the current 0.72 per cent.
While billions are set to flow into so-called A-shares as a result, the weighting of South-east Asian markets will likely drop to about 7.7 per cent from 8 per cent now, Morgan Stanley analysts Sean Gardiner and Aarti Shah wrote in a report published yesterday. "A mild dilution, but overhang nonetheless."
That may help explain why the Philippine Stock Exchange Index fell 0.8 per cent - extending its decline for a third day.
Mr Nicky Franco, head of research for Abacus Securities in Manila, calculates the potential outflows from the Philippines at about US$700 million (S$946.7 million), he wrote in a note yesterday.
By contrast, the ChiNext Index of Chinese small-cap and tech stocks gained 1.2 per cent and the CSI 300 Index advanced 0.9 per cent. Once the latest inclusion is completed - it will start in May - there will be 253 large-and 168 mid-cap China shares in the index.
Still, it may not be all bad news if the net result is that global investors get more interested in the broader Asian region.
"China's greater weight is at the expense of other countries whose weights get adjusted down," AMP Capital Investors head of investment strategy and chief economist Shane Oliver said in Sydney. "But that's only a short-term impact. China's greater weight may in time attract more funds to the Asian region."