The inclusion of China's A shares to the MSCI's global and regional indexes is a mere drop in the ocean, but also a long journey of opportunities for global investors, Nicholas Yeo writes in his essay for finews.first.
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On 1 June, China’s A shares will debut like never before. It has been a long time coming but finally as many as 234 of the yuan-quoted shares of mainland Chinese companies will be included in the MSCI’s global and regional indexes. Listed in either Shanghai or Shenzhen, the shares will be added in two phases, in June and September. It’s baby steps for China’s financial community but this is after five years and four rounds of MSCI discussions with global investors.
And it’s a long journey of opportunities ahead for global investors as these 234 predominantly large-cap stocks are a mere drop in the ocean. The entire A share market is one of the biggest in the world, comprising 3,500 stocks and is worth some $8.5 trillion. The initial index inclusion is only about 0.9 percent of the MSCI Asia ex Japan Index and 0.8 percent of the MSCI Emerging Markets Index. And this could potentially rise to about 14 to 18 percent.
«The MSCI inclusion will show how far China has progressed in its capital market reforms»
With over $1.9 trillion in assets hitched to the MSCI EM Index, funds that track the index will have to allocate about $ 15 billion to A shares after September to avoid deviation. This inflow will hardly move the needle, given the overall free float of $3.4 trillion and the daily turnover of $ 75 billion. Still, the MSCI inclusion shows how far China has progressed in its capital market reforms, specifically, on internationalising the yuan and linking its exchanges to the rest of the world.
More broadly, the A-share market has the widest choice of mainland Chinese companies, including quality companies in unique sectors, such as traditional Chinese medicine. Such sectors aren’t common in offshore markets and some of the companies do have the potential to be market leaders, not only domestically but globally.
«Travel-related businesses offer good access to the growing middle class»
Admittedly in A shares, the dispersion of potential returns is also much higher than many other markets elsewhere, and for the discerning investor, it can mean reaping handsome potential gains. Furthermore, the A-share market has historically been less correlated to global equities than H shares, offering diversification benefits to institutional investors.
China’s consumption of anything and everything is certainly one of the most-watched trends among investors in emerging markets. Companies that can benefit from growing domestic consumption are faring well. For example, travel-related businesses and makers of smart appliances offer good access to the growing middle class and the pursuit of quality. The insurance and healthcare industries are set to benefit from an ageing population and an increasing desire for a healthier and better quality lifestyle.
If China continues to commit to stock and capital market liberalisation, investors are unlikely to be kept waiting too long for quality to grow and more investable companies to surface.
Nicholas Yeo is the Director and Head of Chinese and Hong Kong Equities at Aberdeen Standard Investments.
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