(Reuters) - STORY: U.S. index provider MSCI Inc (MSCI.N) said on Tuesday it will add domestic Chinese equities to its global emerging markets benchmark index.
MSCI’s decision to add the “A” shares to its widely tracked Emerging Markets Index .MSCIEF could move as much as $400 billion of funds from asset managers, pension funds and insurers to mainland China’s equity markets over the next decade. The company had declined to add the shares for three years leading up to Tuesday’s decision.
MSCI decided not to add Argentina to the index and will consult on adding Saudi Arabia. Nigeria will remain a frontier market, awaiting further review.
ASHA MEHTA, SENIOR PORTFOLIO MANAGER, ACADIAN ASSET MANAGEMENT, IN BOSTON:
”In terms of implications... I think we’re likely to see more foreign investors looking for local access of the China A share market. It’s conceivable that as more investors start to put capital to work in these markets, that will be a return driver. This may very well be a capital appreciation event. Valuations are not cheap right now, so I don’t know how much room there is to go, and getting that local access can take some time to set up. There could be some short-term positivity on the announcement, but to really see foreign investors start to invest there it may very well take some time.
”China A shares got it, and the regulator has done nice work in making the market more friendly to foreign investors. Argentina has tried to go down that route. The new president has implemented regulations that are more business friendly and set a tone that’s been stronger for foreign investment. But in actuality, the local market is still hard to access. It’s costly. I consider the capital gains tax environment in Argentina to be prohibitive.
NAEEM ASLAM, CHIEF MARKET ANALYST AT THINKMARKETS IN LONDON
”MSCI has finally decided to add China A share to its emerging market index and this is going to bring fresh capital inflows. The Chinese economy has by far improved but the liquidity tightening by the central banks could jeopardize a number of small firm’s balance sheets. If that happens that would have adverse impact on the index. But for now, we do see this as catalyst to attract new capital.”
LUKE OLIVER, HEAD OF ETF CAPITAL MARKETS FOR THE AMERICAS AT DEUTSCHE ASSET MANAGEMENT
“This is going to be a very methodical approach to adding A shares in the industry so it’s going to be a slow burn.... It’s a little bit of a surprise to the upside but not a significant divergence from what we expected.... Even today’s inclusion is just the start of a much bigger move that’s going to play out. They laid out what they wanted to see and China made some great advances toward that.”
LUCY QIU, EMERGING MARKET ANALYST AT UBS WEALTH MANAGEMENT, NEW YORK
On MSCI decision to add domestic Chinese stocks to global benchmark:
“We think it will be a temporary sentiment boost but the real effect on fund flows will likely be limited. We expect about $8 billion to $10 billion initial fund flows after this inclusion. However, that’s just a drop in the bucket versus the average daily trading volume of $70 billion on the ‘A’ shares these days. But nevertheless it is a good, small step in including this huge market into the global equity index.”
On Argentina, Nigeria and Saudi Arabia:
“Both Argentina and Nigeria are delayed. We think Argentina could be initially hit, because the expectation for the inclusion was pretty high. Indeed, the market outperformed the rest of the emerging market or frontier market peers. Nevertheless the domestic fundamental story on the Argentina recovery/reform still remains despite the initial decision right now. We still think this could be a long term positive story but hold tight for temporary weakness.”
“On Saudi Arabia, it is good news that they have opened the consultation and it could be potentially a big one because Saudi is almost the size of MSCI Russia currently. So if it indeed gets included it could be very positive for Saudi to be integrated into the bigger emerging market family.”
JOHN PRAVEEN, CHIEF INVESTMENT STRATEGIST AT PRUDENTIAL INTERNATIONAL INVESTMENTS ADVISERS LLC IN NEWARK, NEW JERSEY
”China A shares have been included in the MSCI indexes (both Emerging Markets and ACWI) after many years of delays over concerns about market access. Thus, the inclusion of A-shares in the index itself is a positive for the Chinese financial markets in general as it gives a boost to the credibility of the financial system and gives easier access to both dedicated Emerging Market investors and to global investors seeking exposure to the Chinese market.
“While the initial allocation itself is relatively modest, the selection of stocks is broader. The move is likely to encourage more investors to increase their exposure to mainland China companies and lead to further development of the domestic market in the medium- to long-term. Further, the move is only a first step and the China weight is likely to increase, given the size of the economy and the growing size of the market.”
EMILY FLETCHER, DIRECTOR AND PORTFOLIO MANAGER AT BLACKROCK (BLK.N) LONDON
”We note the decision by MSCI not to upgrade Argentina from Frontier to Emerging Markets status at this stage.
”Whilst this decision may be a disappointment to some market participants, we would remind investors of the substantial positive macro-economic changes that Argentina has witnessed over recent years.
”We welcome index provider MSCI’s decision to launch a review on whether to include Saudi Arabia into MSCI Emerging Markets index. In our view this is an endorsement of the positive Saudi Arabian stock market reforms.
RYAN STORK, BLACKROCK INC CHAIRMAN, ASIA PACIFIC IN HONG KONG
“We believe our clients will benefit from today’s decision to bring Chinese equities into mainstream investment. BlackRock has continued to support all opening of investment in China’s onshore capital markets for a number of years. As a fiduciary, we look forward to working with regulators and market participants to achieve the best implementation of today’s announcement and eventual full inclusion of China A-shares in global indexes.”
“FTSE Russell enjoys an open and positive dialogue with the Chinese authorities and China A shares remain on our watch list for possible inclusion as a secondary emerging market in our global equity index series. China is making significant progress towards opening its domestic A share and the FTSE Global China A Inclusion Indexes, launched in 2015, are being utilized by some major asset owners and managers enabling further choice for investors looking to include A Shares in their global portfolios.
”FTSE Russell has a strong track record of developing China-focused benchmarks with around $30 billion of assets under management benchmarked to or tracking a FTSE China index and we will continue to consult with the market ahead of our annual review in September”.
“The inclusion of A shares in MSCI EM and other indices is (an) important step in the evolution of the Chinese stock market. The inclusion will start slowly but will ultimately be around 40 per cent of the MSCI Emerging Markets Index. Many investors will use ETFs to gain or increase their exposure to China A share indices.”
KATHY LIEN, MANAGING DIRECTOR, BK ASSET MANAGEMENT, NEW YORK
“It’s definitely going to (put) upward pressure on the yuan. We will likely see an initial pop and then a leveling off. There will be more demand for the currency long term but you would probably see a lot of policy offsets. It might create a more active (Chinese) central bank to ensure the yuan doesn’t appreciate too much. China has been looking at this for some time and has prepared for it. At the end of the day, this legitimizes Chinese investments for global investors.”
PAUL NOLTE, PORTFOLIO MANAGER AT KINGSVIEW ASSET MANAGEMENT IN CHICAGO (ON CHINA)
“There’s big differences between various emerging markets indices and what ETFs are following which ones….”
”It’s still an under-represented country based on its market cap relative to other markets around the world.”
“MSCI is now going to have three quarters of 1 percent in one of the larger emerging markets in the world.”
“For an investors it depends on which index your ETF follows. You think you’re getting broad emerging markets, but you may not be.”
BRENDAN AHERN, CHIEF INVESTMENT OFFICER AT KRANE FUNDS ADVISORS LLC IN NEW YORK
”It’s going to be this incremental dial-up. It’s really as we suspected.... It’s a small step but it’s really just the first domino.... It’s going to dramatically change the scope of the weighting over time that we’re talking about.... Ultimately it means there’s going to be more China in investors’ portfolios....
”It’s good for China in that they want to institutionalize that market. They want foreign investment firms with their knowledge and expertise to help institutionalize the markets. So ultimately it’s a good thing for China. I think for investors it’s a market that’s too big to ignore.... Switzerland, which has one-tenth the GDP of China, has a 50 percent larger weight in investors’ portfolios today, and that makes no sense. So this step will help rectify this.
BRIAN JACOBSEN, CHIEF PORTFOLIO STRATEGIST, WELLS FARGO FUNDS MANAGEMENT, MENOMONEE FALLS, WISCONSIN
“It was ... widely anticipated that this subset of A shares would be included. China was already over 27 percent of the MSCI Emerging Market index, so this won’t be a huge change. Active managers have already been able to invest in these companies. Investors better have a better reason than index inclusion to invest in China. Thankfully, I think investors still have ample reason to consider investing in consumer-oriented firms.”
“I wasn’t surprised (on delaying the reclassification of Argentina). A 100 year bond at 7.9 percent clearly raises some eyebrows, but I think many are expecting that (President Mauricio) Macri’s policy changes will have some staying power. Mexico’s 100 year bond issued in 2015 is trading at a 4.392 percent yield, so maybe some people thought 7.9 percent is worth the risk.”