Foreign capitals flow in A shares with expectation of MSCI inclusion

The Shanghai Stock Exchange on May 30 recorded a trading volume of 115.6 billion yuan, the lowest in recent months, and continued to trade sideways. However, A shares face the test for the inclusion in the MSCI emerging market index for the third time in the middle of June, and probability exceeding 50 percent is expected. Foreign capitals’ interest in A shares thus increased. Yesterday, the Northbound trading witnessed an inflow of nearly 3 billion yuan, the highest within two months. At the same time, some foreign capitals have deployed RQFII-ETF in advance, aiming to buy in A shares through ETFs. Since last week, CSOP FTSE CHINA A50 ETF has acquired 2.6 billion yuan capital inflow.

What are the influences of MSCI inclusion of A shares?

“The trading volume on Monday was extremely low. Without any serious bearish news, A shares are not likely to decline in the short term. Buying in A shares in large amount by foreign capitals could be regarded as bullish news,” said a chief analyst with a securities company who doesn’t want to be identified. Data shows that not only Northbound trading recorded nearly 3 billion yuan of capital inflow on May 30, sources indicated that CSOP FTSE CHINA A50 ETF also obtained inflow of about 2 billion yuan foreign capitals for bargain hunting. Analysis revealed that foreign capitals flow in mainly due to the probability of the inclusion of A shares in MSCI emerging market index.

MSCI will announce on June 15 morning (Beijing time) whether to include China A shares in its MSCI emerging market index. “The question of ‘quota allocation procedures, restrictions on capital flow and ownership of investment gains’ raised by MSCI last year have been fundamentally solved. And after the problem of random suspension of trading by some A share companies was pointed out in this April, the Shanghai and Shenzhen bourses have issued notices to regulate companies that have been suspended trading for too long,” said Li Yifeng, analyst with Sinolink Securities. Li expects 70 percent probability of MSCI inclusion of A shares in June.

According to the Consultation on China A‐Shares Index Inclusion Roadmap issued by MSCI in April, the initial inclusion factor is 5 percent, and the initial weight of A shares in the emerging market index is 1.1 percent. Li believes that, based on the 5 percent inclusion, A shares will attract incremental capitals of 16.5 billion dollars (equivalent to 107.3 billion yuan). Besides, passive ETFs tracking MSCI index can invest some A shares only until the last trading session in May 2017, and some active institutional investors such as hedge funds have purchased A shares in advance and intend to sell shares when the result is announced.

Therefore, in the short term, the incremental capitals will be limited, and the recent capital inflow is mainly resulted from the effect of signal and sentiment on the market. But in the medium and long term, MSCI inclusion will promote internationalization of A shares. It will facilitate overseas institutional investors’ participation in the A-share market, improve the proportion of institutional investors and reduce market volatility.

The market trend is still uncertain

On the one hand, foreign capitals accelerate their steps for bargain hunting; on the other hand, domestic institutions are divergent on whether trading sideways will result in drop or rise.

Institutional investors believe a drop are in the view that if the stock prices have long been fluctuate within a narrow region, funds going long will finally flee the market under the pressure of costs of capital; if bearish news was to come, funds would exit at faster speed and lead to sharp fall.

However, institutional investors believe a rise are in the view that when stock prices traded sideways for a rather long at a low level after plummet, both the range of fluctuation and trading volume shrunk. When the consensus expectation of bottoming out gets some support, there will be high probability for the market to rise.

Guangzhou Wanlong Securities believed that MSCI index including A shares does not mean that capital increment will enter the market at once, hence, it is not proper to pay too much attention to this event, but it should keep a close eye on Fed’s rate increase in June and shareholding decrease in industrial capital. Consolidation in a wide range is more likely to happen next month.

Northbound Trading of Shanghai-Hong Kong Stock Connect gains net inflow for a 11th consecutive trading day

It was most abnormal that massive capital in Shanghai-Hong Kong Stock Connect program flowed northward yesterday. Based on HKEx data, the intraday surplus capital was 10,015 million yuan on May 30 for the Northbound Trading of Shanghai-Hong Kong Stock Connect, accounting for 77 percent of the intraday amount, and oversea capital buying A shares through this channel recorded 2,985 million yuan. It is worthy to notice that this platform has gained net inflow for a 11th consecutive trading day, and its scale growth suddenly speeds up.

RQFII: net inflow of CSOPFTSEChinaA50ETF recorded RMB2 bln yesterday

It reports that CSOPFTSEChinaA50ETF received net subscription of 200 million fund units yesterday, which means net inflow of about 2 billion yuan for this ETF, and fund manager will chose opportunities to buy related A shares. It also learns that this is the largest single-day scale for subscription of this ETF since its establishment. CSOPFTSEChinaA50ETF tracks China A50 index.

Insider familiar with the said ETF expressed that capital has constantly flowed in the ETF since last week.

Transaction information disclosed by HKEx shows that CSOPFTSEChinaA50ETF received net subscriptions of 56 million fund units last week, meaning about net inflow of 600 million yuan. The fund scale of the said ETF began to greatly increase on May 25 again, from 1,779 million fund units to 1,835 million fund units. CSOPFTSEChinaA50ETF had constantly suffered from repos since the middle of April.

In the same day, over five institutional investors simultaneously subscribed this ETF in the primary market, said He Xuan, director at ETF & index strategy department of CSOP Asset Management.

Investment advices: which industries are likely to attract attention of foreign capital?

For many professional insiders, it is not determined now whether A shares can continuously rebound. Therefore, a large scale of buying low at the bottom will face huge risk, but it is proper to pay attention to short term theme stocks related to MSCI and Shenzhen-Hong Kong Stock Connect program. Based on operational habit of oversea funds, blue-chip stocks will possibly attract these funds.

A shares to be included in the MSCI should reflect the overall market features, hence, individual stocks benefiting from this event will be mainly large-cap blue-chips based on market value, evaluation, performance and rareness indicator, according to Wang Jiayin, analyst at Shenwan Hongyuan Securities. Xue Hexiang, researcher at Huatai Securities, believed that blue-chips and consumption stocks with low evaluation will directly benefit from A shares’ inclusion in the MSCI. Xue is most optimistic about industries whose evaluation is lower than the average five-year historic record, such as finance, medicine, real estate and automobile, and related companies including China Everbright Bank Co., Ltd. (601818.SH), China Merchants Bank Co., Ltd. (600036.SH) and SAIC Motor Corporation Limited (600104.SH) are also promising.

In line with MSCI’s announcement in April, about 421 constituent stocks in the A-share market meet the requirements, Li Lifeng, analyst of Sinolink Securities, pointed out. Based on the MSCI’s index formation standard, the said constituent stocks feature in large market value, free circulation market value, high liquidity and so on. Therefore, the selected individual stocks are usually large-cap blue-chips. The market value of financial industry accounts for a high proportion of 32.17 percent, according to report on MSCI China A-share index, followed by industry and selectable consumption with 17.79 percent and 11.93 percent respectively.  

Hence, blue chips in the fields including finance and consumption are most likely to benefit after A shares being included in the MSCI merging markets index, such as Ping An Insurance (Group) Company Of China, Ltd. (601318.SH), China Minsheng Banking Corp., Ltd. (600016.SH), China Merchants Bank Co., Ltd. (600036.SH), China Vanke Co., Ltd. (000002.SZ), CITIC Securities Company Limited (600030.SH), Haitong Securities Company Limited (600837.SH), Kweichow Moutai Co., Ltd. (600519.SH), Inner Mongolia Yili Industrial Group Co., Ltd. (600887.SH), Gree Electric Appliances, Inc. of Zhuhai (000651.SZ) and Midea Group Co., Ltd. (000333.SZ).