MSCI move expected to spark inflows from foreign investors

shares, making them represent around 0.39 percent of the weighting on the MSCI Emerging Markets Index.

The second step will take place in September when the list of Chinese shares to be added to the MSCI will be further expanded and it will likely bring the representation of A shares to around 0.8 percent of the MSCI emerging market index.

The inclusion of A shares means that foreign investors such as exchange-traded funds, pension plans and endowment funds will need to allocate the added Chinese stocks if they want to closely track the MSCI benchmark gauges.

UBS Securities estimated that the inclusion could lead to $18.4 billion of fund inflows into the A-share market.

“Consumer discretionary, consumer staples and healthcare are likely to benefit more from foreign inflows, as we find that foreign investors have persistently favored these sectors in their positioning,” said Gao Ting, head of China Strategy at UBS Securities.

“The inclusion could lift sentiment in the current weak market environment, as the recent accelerating Stock Connect northbound flow signifies increasing market attractiveness to foreign investors,” he said.

The Chinese securities regulator has improved market access to foreign investors and addressed their liquidity concerns by increasing trading quotas and strengthening regulations on the trading suspension of listed companies. These efforts have helped A shares gain entry to the MSCI system following three failed attempts.

Raymond Ma, portfolio manager at Fidelity International, said the MSCI inclusion will help the A-share market to improve liquidity and see it increasingly driven by fundamentals rather than shortterm market noise.

“With the A-share market primarily dominated by retail investors currently, market movements tend to be driven by short-term market noise and herding behavior. However, as the proportion of institutional investors increases over time, we expect this to change,” he said.