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MSCI EM Index's A-share boost to drive portfolio rebalancing

Move to increase the weighting of China A-shares will give more investment opportunities for global investors, analysts say

Singapore

EXPECT active and passive funds that track the MSCI Emerging Market Index to gradually rebalance their asset allocation, market analysts have said.

This comes on the back of index compiler MSCI's move to increase the weighting of Chinese-listed stocks (A-shares) in its benchmark indices and adding more of those companies in the process.

DBS Bank's chief investment officer Hou Wey Fook told The Business Times that the move "is a long-time coming, judging from the various MSCI announcements over the years".

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Catherine Yeung, Fidelity International's investment director, explained that the only surprise was the increased inclusion of mid-caps from November 2019, which was brought forward from 2020.

Given that China has been taking steps to modernise and open its capital markets, Francois Perrin, a portfolio manager at East Capital, commented that it is "another step on a decade-long journey toward full integration".

UBS's head of Asia-Pacific market structure David Rabinowitz said that the Swiss bank sees a continued shift in the rebalancing of investment funds to account for these changes.

Mr Hou and Tony Lewis, HSBC Singapore's head of security services, shared Mr Rabinowitz's sentiment. They believe that similar trends can be expected from asset managers and asset owners based in Singapore.

The A-share profile remains small (currently 0.71 per cent of the MSCI EM Index), but by the time that the weight increases are fully implemented in May 2020, China A-shares on the index will stand at 450 and represent about 3.3 per cent of the index.

The inclusion factor will also rise, meaning more foreigner ownership, which Mr Lewis said HSBC conservatively forecasts to be 400 billion yuan (S$80.5 billion) of foreign inflows into the A-shares market this year.

Together, they translate to deeper investment opportunities for global investors, a move that is welcomed by fund managers and investment strategists.

Mr Hou said: "It further positions China A-shares as an asset class that fund managers must have exposure in."

"In addition, there are many attractive companies listed on the A-share market that are not represented on the H-share (Hong Kong-listed Chinese stocks) market. This will offer a wider opportunity set, including diversification benefits to global funds invested in Asia."

Equity markets in mainland China have generally been viewed as volatile. Beijing's influence on the markets, poor corporate governance standards and restricted access to these stocks have not helped either.

But some of these views have the avenue to be changed. Eric Moffett, T Rowe Price's portfolio manager of its Asia Opportunities equity strategy feels that increased foreign ownership would be a good incentive. This would increase the transparency of Chinese firms' reporting practices and the likelihood of adopting strategies that take into account shareholders' interest, he said.

Jeffrey Halley, a senior market analyst at online trader Oanda, noted in a morning note that it would be "interesting to watch the reaction by Chinese stocks" after MSCI's announcement between Thursday's and Friday's Asian trading sessions.

In fact, market sentiment towards China was buoyed by it. Progress on the A-share market's internationalisation process sent the Shanghai Compsite up 53.05 points or 1.8 per cent to close at 2,994.00 while posting its biggest weekly gain in nearly four years. Meanwhile, ChiNext - the equivalent of Wall Street's Nasdaq - rose 2.1 per cent at the close on Friday.

Market moves on Friday seem to suggest that China's gain was the loss of other emerging markets in Asia.

However, DBS's Mr Hou feels that increased exposure to China would not spell fund outflow from other markets as "weightings across different markets is a function of relative attractiveness, and this takes into account fundamentals and valuations".