MSCI to include China A-shares

What's the signficance of MSCI's inclusion of China A-shares in its indices?

21 Jun 2017

MSCI's decision to include a selection of China A-shares in its indices shows China's financial reforms are working and marks the first step along the road to fuller inclusion in the future.

MSCI, a global index provider, will add a selection of China A-shares to its MSCI Emerging Markets (EM) Index from 2018, marking the first inclusion of mainland-listed shares into global indices, and passing a milestone in China's integration with global financial markets.

MSCI inclusion acknowledges China's progress with reform and opening

China has opened its financial markets to international investors through a series of steps in recent years, most notably the launches of the Stock Connect programs linking Hong Kong with Shenzhen and Shanghai, and MSCI's A-share inclusion acknowledges China's progress.

MSCI plans to add 222 China Large-Cap A-share stocks to its EM Index at a 5% inclusion factor, which means the stocks added to the index represent approximately 5% of the adjusted market capitalization of the A-share index.

Inclusion will take place in two steps, with stocks accounting for 2.5% of the adjusted A-share market cap added in May 2018, and stocks representing the remaining 2.5% being added in August 2018 (1). The included stocks will represent 0.73% of the MSCI Emerging Markets (EM) Index.

China's equity markets are too big to ignore

In our view, MSCI's inclusion of A-shares into its indices makes the benchmark more representative of emerging markets. That's a good thing for investors because China's A-share market is too big to ignore, and the market is predicted to grow over time.

More significantly, integration of A-shares in MSCI's EM index connects Chinese companies with global equity markets, and that should introduce more long term institutional investors and give foreign investors more choices when investing in China.

MSCI inclusion to have long-term impact on Chinese equities

In addition, as more global investors are attracted to the A-share market, we believe new investment strategies will emerge, such as long-term oriented and fundamentally-driven, and those strategies will change the market's structure significantly, with longer-term investors being more influential on the market, and that marks a change from now, because the market is predominantly driven by retail investors.

We also believe the inclusion of A-shares in MSCI indices will help improve corporate governance and many other aspects of the A-share market because Chinese companies will bring their standards in line with those expected by international investors.

Looking ahead, Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, said (2) that, "When further alignment with international market accessibility standards occurs, sustained accessibility is proven within Stock Connect and international institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index.”

As such, we see the partial inclusion of 5% of the A-share market as the first step in a long process through which, ultimately, the A-share market gets fully included in the MSCI EM Index. That's because we believe the Chinese government is committed to opening China's financial markets and delivering precisely the reforms mentioned above.

Therefore, in our view, the inclusion of the selected shares in the MSCI EM Index marks the start of a process of integration that will bring investors closer to both China and the attractive opportunities in A-share markets.

Canada Asset Management

Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report was compiled, and any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Commentary is provided at a macro level and is not with reference to any investment strategy, product or fund offered by UBS Asset Management and is provided in Canada generally pursuant to the registration exemption provided for in Section 8.25(2) of National Instrument 31-103 and in Ontario pursuant to Section 34 of the Securities Act (Ontario) and does not purport to be tailored to the needs of the person or company receiving the advice.. The information contained in the materials should not be considered a recommendation to purchase or sell any particular security. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. UBS Asset Management services offered to Canadian persons are provided by UBS Asset Management (Canada) Inc., a Nova Scotia corporation. UBS Asset Management (Canada) Inc. is an indirect wholly-owned subsidiary of UBS AG and is registered as a portfolio manager and exempt market dealer (in all provinces of Canada), commodity trading manager (Ontario), adviser – commodity futures (Manitoba) and investment fund manager (Ontario, Quebec and Newfoundland), all pursuant to Canadian securities law. Materials may include forward-looking statements. Actual future results, however, may prove to be different from expectations. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.

Please confirm you are a Canada resident to proceed.

Confirmation
Please select at least 1 checkbox