Limited impact from China’s MSCI inclusion
Investors expect change to have little effect on local market
As investors digest the implication of China’s impending entry into the Morgan Stanley Capital International’s (MSCI) global emerging markets (EM) benchmark index, analysts say the decision by United States-based index provider MSCI to include Chinese stocks from next year will only have a limited impact on other EM shares, including those in Malaysia.
They note that while the entry of Chinese stocks into the MSCI Index, which is the world’s most influential compiler of share indices, will attract funds from investors worldwide, the potential outflow from the EM markets as a result of the change will likely be short-term and insignificant.
Ambank Group Research head and chief economist Anthony Dass, for one, noted that given the date of the Chinese stocks’ inclusion and the relatively small weighting involved, the dilutive impact on other EMs, including Malaysia, would be fairly muted.
“The inclusion, which will take effect in June 2018, comprises 222 mainland Chinese stocks with an initial total weighting of only 0.7% – which means its dilutive impact on other EMs, including Malaysia, is fairly muted,” said Anthony.
“Nonetheless, we remain mindful that given the growing breadth and depth of China stocks, it is inevitable that the weighting of other EMs in the index, including Malaysia, will be repeatedly tweaked down in favour of China in the coming years,” he said.
Over the longer term, the full inclusion of A-shares would bring the weight of Chinese stocks in the index from about one-fourth to more than one-third.
“Based on our calculation, ceteris paribus, the full inclusion of A-shares would dilute the weighting of existing constituents by 11% across the board,” said Anthony.
MSCI announced on Tuesday its decision to include 222 of China’s A large-cap shares in its EM index from June 2018. These stocks would represent 0.73% of the weight of the index.
It is noteworthy that MSCI had in the previous three years turned down the proposal to include China’s shares due to various issues such as the 20% monthly repatriation limit and abuses on stock trading suspensions. Some of these issues remain unresolved, although MSCI had changed its stance, compelling the estimated US$1.6 trillion (RM6.86 trillion) of global funds that track the index to buy the Chinese stocks from next year.
Meanwhile, Rabobank Group senior AsiaPacific strategist Michael Avery said he did not see the inclusion of Chinese stocks in the MSCI index as a “game changer”.
“Indeed, investors will have to automatically allocate capital into China due to its new MSCI status... but let’s not get too excited,” Avery, who is based in Hong Kong, wrote in his note to clients.
He pointed out that the overall weighting of the Chinese stocks on the total EM index at 0.73% would imply total inflows of only US$11bil (out of the US$1.6 trillion of global funds that track the index) vis-a-vis China’s total market size of US$6.8 trillion. What’s more, it would only involve 222 stocks out of the more than 3,000 companies listed in the domestic A-share market.
“That’s hardly the definition of ‘game changer’ for either the yuan (in terms of inflows to counter-balance constant outflows) or for Chinese equities themselves,” Avery explained.
Meanwhile, Stephen Kam, senior product specialist of Asian equities at HSBC Global Asset Management, said the inclusion of Chinese stocks in the MSCI EM index would have limited impact over the short term due to its gradual introduction in the weightings. On a longer-term view, however, the impact would be positive for Chinese onshore equity markets given the potential new inflows.
“Ultimately, the A-share index inclusion will help to shine some light on China’s onshore equity market and introduce a new set of investors to
the market. But in the short term, it’s unlikely to be the catalyst that sparks a re-rating of the market. Instead, investors should look to further market reform and improving prospects for company earnings on the back of those reforms to attract new capital from international investors,” Kam explained in his note.
The Shanghai Composite Index yesterday gained 16.20 points to close at 3,156.21.
Conversely, the Malaysian equity market fell in tandem with most other regional markets, as oil prices fell on global supply glut worries and investors took profit after recent gains.
The FBM KLCI fell 5.14 points to close at 1,775.57 yesterday, led by blue chips.
According to AmInvestment Bank Research, Malaysia’s weighting in the MSCI EM index was estimated to have reduced slightly to 2.41% following the recent rebalancing exercise compared with about 2.47% previously. It pointed out that many actively managed EM funds had underweighted Malaysia, that is, below the weighting recommended by MSCI, prior to the rebalancing exercise. This would limit the selldown of the local market by investors.
AmInvestment Bank Research said it remained positive on the equity market outlook in Malaysia, although there could be volatility over the immediate term, as the market had moved a little further ahead of its earnings. It maintained its FBM KLCI target at 1,745 points for end-2017 and 1,900 points for end-2018, based on 17.5 times forecast earnings.