Public funds are busy allocating MSCI China A-share international index products, largely out of their expectations that the incremental funds will shore up constituent stocks after the inclusion of the A shares into the MSCI Emerging Market Index. Mainstream institutions believe that although the bullish run driven by the inclusion of the A shares into the MSCI Emerging Market Index is something expected, and constituent stocks already took a ride, the continued long-term capital inflows will continue to boost the performance of leading stocks.
Attract foreign investors’ attention on A-share market
According to the MSCI’s route plan, MSCI will formally include the A-shares into the MSCI Emerging Markets Index in June 2018, with an initial factor of 2.5 percent. The factor will be increased to 5percent in September 2018. The A-shares will account for 0.73 percent of the MSCI Emerging Markets. China Merchants Fund expects that the short-term inflow of A shares will reach 17 billion to 18 billion US dollars. According to the progress of MSCI, China's A-share market will eventually all be included in the emerging market index. From a medium to long term, this is expected to bring about 340 billion US dollars in incremental funds for A-shares.
It is now only a step away from the inclusion. Many institutions are relatively optimistic about the driving role of this incremental fund. Private equity fund Star Roc Investment said that as it is less than three months before the A-shares is included in the MSCI Emerging Market Index on June 1, 100 billion yuan is waiting to come in. The incremental capital may tend to increase allocation in the A-share market. Although the initial weight of newly added stocks is only 0.73 percent, its significance lies that it will shift the market’s focus to the A-share market as the MSCI index is taken as a reference by institutional investors. From the perspective of valuation, Bloomberg estimates that MSCI China's P/E ratio will be only 13.30 in 2018. As an important economy in the global economy, the market price-earnings ratio in the Chinese market is much lower than that in the international market, which is greatly undervalued.
Bai Haifeng, director of the International Business Department of China Merchants Fund, believes that based on the international experience, most markets would rally after being included in the MSCI index. The impact of the MSCI index to the A-share market should not be underestimated. The inclusion of A shares into the MSCI index will not only bring in more capital. More importantly, it is consistent with the future development direction of China's capital market and the trend of interconnection, which will help attract overseas investors to systematically focus on A-shares and optimize investor structure. In the long run, value investment will become the mainstream and long-term optimal strategy for A-share investment. MSCI will become the benchmark for future international investment in China.
Industry leaders expected to benefit
Over the past year or two, value stocks represented by the CSI 50 index and CSI 100 index constituent stocks have performed outstandingly. While since the beginning of this year, growth stocks have started to strengthen, triggering more discussion about investment style. Currently, the number of constituent stocks currently in the MSCI Emerging Markets Index is 233, of which 209 stocks are also selected in the CSI 300 Index, which covers 90 percent of the equity of the CSI 300 Index. Will the upcoming inclusion stimulate the market's enthusiasm for blue-chip value stocks?
Haitong Securities chief strategy analyst Yan Yugen analyzed that the market will continue to anchor at the performance-based logic but in a more balanced style. The focus will be leading stocks, including value and growth leading stocks.
Guodu Securities viewed that with A shares to be included into MSCI index, institutional investors from home and abroad will be major contributors to capitals and blue chips will see heavy allocation. Driven by changes in these two structures, the trend of theory of investment in A shares transforming to blue chips in 2018 hasn’t changed.
Bai Haifeng indicated that industrial leaders with higher weight and great match between growth and valuation will benefit from it. All these 233 shares represent core assets of A shares, including A50 index and blue chips in several sectors. This composite index is expected to gain remarkable returns in the long run.
Translated by Coral Zhong
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