Fidelity bullish on inclusion of top A shares in MSCI

An industry insider said she hopes to see more openness in China’s A-share market once it is included in MSCI emerging markets index on Friday.

Lynda Zhou, portfolio manager at global asset management service provider Fidelity International, said that there should be greater access to the A-share market for overseas investors after its addition to the MSCI emerging markets index.

“It can be difficult to predict when and how the bottleneck of the current transaction mechanism will emerge. But over time, it is very likely we will see more overseas investors willing to snap up the A shares. In this sense, the A-share market should provide more gateways for them,” she said.

Beijing-based China International Capital Corp Ltd estimated that the A-share market will attract overseas inflows of $21.2 billion by August.

The A-share market’s inclusion in the MSCI will be a twostep process. The initial inclusion of 226 Chinese A shares will take place on June 1, representing 0.39 percent of the weighting on the MSCI emerging market index. The second step is scheduled for September, when the weighting will rise to 0.8 percent.

Zhou said the 0.8 percent inclusion rate is “unreasonable”, given that China is the world’s second-largest economy and the A-share market is also the world’s second-largest in terms of market value.

But, she said the A-share market will become more mature, efficient and systematic with the participation of more overseas institutional investors, who prefer longterm investments and follow a steady investment procedure.

In this sense, A-share-listed companies that have stronger business models, high return on equity, solid corporate governance and stable balance sheets will be more favored, she said.

Looking into the second half of 2018, Fidelity predicted that fluctuations will set the tone for the A-share market. Zhou said stabilized prices, the increased investment in the manufacturing industry in the first half of this year, and rational sentiment among investors are all good news for the market.

Share prices in the A-share market have come to a reasonable level after fluctuations over the past few months, she said. Domestic consumption is showing robust growth, led by the rise in the textiles, garments, cosmetics, and food and beverage sectors. On top of that, the consumption potential in lower-tier cities will be further explored, injecting more vibrancy into the economy and thus stimulating the stock market in the long term, Zhou said.

But Fidelity also warned of negative messages that might affect the market. The recent trade frictions between China and the US have caused temporary uncertainties. Soaring oil prices have raised expectations of higher inflation rates. Also, investment in the property and infrastructure sectors has shown signs of a slowdown. All these could undermine investors’ confidence, Zhou said.

For investors, Zhou said that the financial sector of the A-share market is one choice for the following months, especially banks that are currently undervalued. Public companies in the consumption sector with a global vision and higher level of automation, high-end manufacturing companies, and pharmaceutical companies might all be good picks for investors in the next few months, she said.