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MSCI announces China A-shares to be included in the MSCI EM Index: What does it mean for investors and the China markets?

By June 21, 2017No Comments

This morning the MSCI announced the landmark decision to add 222 China A-share stocks to the MSCI EM Index, all of which are accessible via the Shanghai and Shenzhen – Hong Kong Stock Connect programs.  This initial addition will account for 0.73% of the MSCI EM Index and helps pave the way for a substantial inclusion of the A-shares in the Index over the mid to long-term that will force investors to re-evaluate their view and allocation to the world’s second largest economy.

Snapshot of MSCI EM Index:

  • Index funds and ETFs have over US$2 trillion bench-marked against the MSCI EM Index with Hong Kong stocks currently accounting for around 26% in the Index.
  • If a full inclusion of China’s A-shares were realized then Hong Kong and China combined would account for more than 45% of the Index.

What the A-share inclusion means:

  • We expect an initial US$12-14 billion in assets to flow into the MSCI EM Index due to the inclusion.
  • Whilst this first inclusion is small, it holds significant relevance as we expect A-shares to increase as a constituent to account for over 18% (or over US$300 billion) of the Index in the next 3-5 years.
  • The inclusion will help to institutionalize China’s domestic markets, a move that will be welcomed by the regulators in the retail dominated markets.
  • Global institutional investors, including the world’s largest fund houses, have expressed their support for the inclusion and we expect many to re-evaluate their allocation to A-shares, both passive and active.
  • The regulators will continue to adjust the QFII, RQFII and Stock Connect programs to allow greater access to the markets and ensure a steady increase to the number of constituents added to the MSCI EM Index.

To summarize, the inclusion is a milestone event that we believe will improve the efficiency and transparency of the China markets whilst forcing investors to re-evaluate their long-term view on the China markets.

Our Endowment Index splits our exposure to Emerging Markets into two: 1) Diversified Emerging Markets allocation using “IEMG” ETF and 2) China A Shares allocation using “ASHR”. Go to www.EndowmentIndex.com to learn more about this Index.

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