China's MSCI Bow Seen High on Symbolism, Low on Immediate Impact

(Bloomberg) -- MSCI Inc.’s inclusion of Chinese-listed stocks, known as A shares, in its global indexes is an important symbolic step, but one that will have limited initial impact, according to analysts and market participants.

China’s stocks could account for 17 percent of the MSCI Emerging Markets Index in five years’ time, from less than half a percent now, Goldman Sachs Group Inc. strategist Timothy Moe said in a Bloomberg Television interview on Friday. Total inflows associated with MSCI inclusion will be about $22 billion after the second inclusion day later this year, he said, compared with $60 to $70 billion average daily trading value in China.

“Clearly, the initial impact right here, right now is modest,” Moe said. “But the symbolism in our view is very, very important.”

Market reaction to the inclusion was hardly euphoric on Friday, as the Shanghai Composite Index slid 0.5 percent, heading for its seventh loss in eight sessions.

JPMorgan Chase & Co., Bank of America Corp. and Bocom International Holdings Co. are among other brokerages expecting that the weighting of Chinese stocks in MSCI indexes will increase.

Hao Hong, Bocom International chief strategist:

  • “I think at the moment it’s a baby-step forward. After all, it’s less than half percent initially and three months later we will go up to 0.8 percent”
  • Pension funds have to go in and buy half a percent of the index. We should look at the active international funds
  • A-share market is driven by retail investors, and even institutional investors behave like them as the time frame for their performance measurement is very short

Goldman’s Moe:

  • Taking A shares plus the Hong Kong-listed Chinese stocks, known as H shares, currently in the index, China stocks could be more than 50 percent of the MSCI Emerging Markets Index over the next five to eight years
  • “Institutional investors globally will need to take this market very seriously”
  • Likes both A and H shares, but A shares are incrementally more attractive as they trade more cheaply. There are also undiscovered or under-researched stocks in China that offer some alpha opportunities for overseas investors

BoAML strategists including head of China equity strategy David Cui:

  • Foreigners own 2 percent of A shares versus 28 percent for India, 30 percent for Japan and 40 percent for Taiwan, which suggests sustained A-share purchases by overseas investors over time
  • They’re likely to initially focus on quality large-caps due to lack of familiarity with the broad market and relatively small A-share weighting
  • To get the yuan accepted globally, China may continue to support foreign purchases of A shares
  • At full inclusion, A shares could account for 30 percent of the MSCI Emerging Markets Index, attracting roughly $900 billion of inflows

JPMorgan’s head of China equity strategy Haibin Zhu:

  • Expect around $3.3 billion of inflows to A shares, but the impact on the market will be limited
  • “However, this is a very important step in China’s capital account opening-up process and a symbolic event of the capital market connectivity between China and the world”
  • “China’s equity market now officially enters the global space”

Nicholas Yeo, head of China equities at Aberdeen Standard Investments:

  • “We would not be buying just because of MSCI inclusion -- you don’t want to be buying along with many others as well. At least for active funds, those who wanted to be involved have already been involved”
  • Trade war and deleveraging concerns are weighing on domestic investor sentiment, making MSCI a “non-event” given its size
  • The potential for improvement in Chinese companies’ fundamentals and the quality of the stock market is of bigger significance than MSCI inclusion, as long-term, fundamentals-focused foreign fund managers participate

UBS Group AG head of China equities Thomas Fang:

  • Investors have accumulated A shares over the past two months
  • Domestic institutional investors are increasingly appreciating the global, long-term valuation and growth approach. Retail investors tend to trade more on news, and more often

Mobius Capital Partners LLP co-founder Mark Mobius

  • “With the A-share market coming into the availability of foreign investors, the opportunities are incredible”
  • Look at both China and Hong Kong because very often there are discrepancies in pricing and valuations

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