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MSCI Boosts China, Adds Saudi to Emerging-Market Indexes

(Bloomberg) -- Twenty-six China A shares will be added to the MSCI China Index, while 30 equities from Saudi Arabia and eight Argentine securities are set to join the MSCI Inc.’s emerging-market stock benchmarks, steps that could potentially draw billions of dollars of investor inflows.

MSCI, which announced the additions of Saudi Arabia and Argentina last June, said the stocks will join its indexes as of the close of trading on May 28. Argentina will account for 0.26% of the MSCI Emerging Markets index, while Saudi Arabia will have a 1.42% weighting. China A shares will be left with a 1.76% weighting in the broad developing-nation gauge, it said. The China gauge will have 31 additions in total, including five that aren’t A shares.

Kuwait stocks, which had been on the firm’s watch list for a potential upgrade, weren’t included. The firm is still holding a consultation on the country and will probably announce the result at its annual review in June, according to Pavlo Taranenko, executive director of index research at MSCI. If it gets the upgrade, Kuwait would exit the frontier-market group in 2020, leaving current No. 2 -- Vietnam -- to dominate the asset class.

MSCI is the world’s biggest index compiler and its emerging-markets index is the most important for the asset class, with as much as $1.8 trillion in assets benchmarked to it as of June 2018. The stocks are being added at a time when developing-nation assets are in the midst of a sell-off tied to increased Sino-American trade tensions, with Chinese shares in particular in the firing line.

China Sell-Off

Foreigners are dumping mainland China-listed shares at a record pace. Already this month, 17.4 billion yuan ($2.6 billion) of A shares have been sold through trading links with Hong Kong, putting May well on track to surpass the 18 billion yuan outflow in April.

MSCI Boosts China, Adds Saudi to Emerging-Market Indexes

While Chinese stocks remain some of the best performing in world this year, about $1 trillion has been erased from the nation’s equity markets in just three weeks as the trade dispute reignited. On Monday, China announced it will increase tariffs imposed on about $60 billion of U.S. goods in retaliation for President Donald Trump’s latest escalation of the trade war.

The Shanghai Composite Index has fallen about 6% this month. It’s up more than 16% year-to-date.

MSCI will increase the inclusion factor of large-cap A shares to 10% from 5%, according to the statement, though that doesn’t guarantee a boost for the market: The initial inclusion of A shares last year did little to stop the worst rout in a decade. Inflows from index-tracking funds are minor compared to the size of China’s market, which is dominated by retail investors.

Recent volatility in Chinese shares won’t have an impact on MSCI’s plans to raise the weighting of large-caps this year, according to Zhen Wei, director of China research at MSCI Inc. However, it could mean a change in the number of mid-caps that are included in the November review, he said in an interview in Singapore on Thursday.

“If A shares underperform other emerging markets on relative terms, it will be reflected in market weight,” and vice versa, he said.

Argentine Anxiety

Argentina’s inclusion had been long awaited by investors, who saw last year’s returns wiped out by a peso rout that forced the government to seek a $56 billion loan from the International Monetary Fund. More recently, the nation’s assets have been pummeled by investor anxiety over President Mauricio Macri’s chance of winning re-election in October.

Saudi Arabia’s stocks have also suffered from geopolitical tensions, trimming gains fueled by expectation for MSCI’s decision. The Tadawul All Share Index slumped 3.6% on Monday, the most since the killing of journalist Jamal Khashoggi in October.

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