SINGAPORE (BLOOMBERG) - Global equity investors wanting greater Chinese stock exposure without taking on active management strategies have reason to celebrate MSCI Inc.'s latest tweak to benchmark indexes. Yet the move also creates some losers.
"With China being added to the investible list of indices, tracking funds will have to rebalance their holdings to accommodate for this, which could result in an overhang for other indices in the region," said Justin Tang, head of Asian research at United First Partners, a firm specializing 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 of dollars 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 on Friday. "A mild dilution, but overhang nonetheless."
That may help explain why the Philippine Stock Exchange Index was down 1 per cent as of 11:09am in Manila, while the MSCI Asia Pacific Index was up 0.2 per cent. Nicky Franco, head of research for Abacus Securities Corp in Manila, calculates the potential outflows from the Philippines at about US$700 million, he wrote in a note on Friday.
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," said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors Ltd in Sydney. "But that's only a short-term impact. China's greater weight may in time attract more funds to the Asian region."
