Five Investment Themes in the Year of the Dog
3. Liberalizing China’s Markets
Last year, MSCI announced that from this June, 222 large-cap Chinese A-shares will be included in the MSCI Emerging Market and ACWI indices through a two-stage process. This represents a milestone in the evolution of China’s domestic equity capital markets, the second-largest in the world by market capitalization. It also reflects the significant progress by the Chinese authorities in opening up its markets to foreign investors, especially through the Hong Kong and Shanghai/Shenzhen Connect schemes.
This event could easily be dismissed in the short term, as the initial impact on indices is likely to be small due to MSCI’s phased approach to inclusion. China A-shares will represent just 0.73 percent of the MSCI Emerging Markets Index in 2018, for example, due to MSCI’s partial inclusion factor of 5 percent. But as China’s domestic equity market opens up more to foreign institutional investors and MSCI raises its inclusion factor for the A-share market, international investors will become a larger participant in the A-share market. As a result, we expect correlations with other global equity markets to increase.
