Monday, 24 September, 2018

MSCI Could Usher China Markets Into the Big Time

By Detlef Glow By Detlef Glow
Kelvin Reese | 21 June, 2017, 07:09

In March, however, MSCI moved to relax its investment criteria by cutting the number of stocks to 169 from 448 in a bid to address curbs on repatriating capital from China and concerns over the country's high number of suspended stocks.

In three previous index reviews, the benchmarker has held off on adding Chinese shares because of worries about limited access for foreign investors to the country's markets.

MSCI plans to add 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73 percent of the weight of the MSCI Emerging Markets Index at a 5-percent partial Inclusion Factor, according to its 2017 market classification review released Tuesday. The country's dominance has only increased recently with the addition of USA -traded firms including Alibaba Group Holding Ltd. - Adoption of new corporate governance rules issued by the Saudi Capital Market Authority (CMA) in February to enhance the rights of shareholders and board members and provide greater clarity and more transparency around determining commercial strategic planning, and roles, responsibilities and oversight of corporate entities and third parties.

"Using the official rate means that MSCI is overstating year-to-date performance of their Frontier Market Index by about 1 percentage point", said Tom Egbert, an analyst at Frontaura.

This is why, the A-shares' inclusion in the MSCI indices would increase their global recognition and temper the negative reputation of worthy mainland shares.

Recently analysts working for various investment brokerages have changed their ratings and price targets on shares of Proshares Ultra MSCI Emerging Markets (EET).

"Potential inclusion in MSCI's Emerging Market Index signals to worldwide investors that the country's capital market has attained greater maturity in terms of efficiency, governance and regulatory framework".

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Reservations remain over pre-approvals and technical issues related to Stock Connect, including the timely execution of trades and settlement, as well as a segregated accounts model that remains out of line with global standards.

On June 20, 2017, the MSCI index committee will make the decision of whether or not the Chinese onshore stock market will be included in the MSCI Emerging Markets Index. The MSCI China Index has advanced 25 percent, trouncing a 1.2 percent gain in the Shanghai Composite Index.

The MSCI decision was overshadowed by the fall in oil prices to seven-month lows following news of an increase in production from Libya and Nigeria.

Saudi Arabia got better news, passing a major barrier to being classified by next year as an emerging market, an upgrade that may draw billions of dollars to its traded companies. Prior to Tuesday's decision, it had excluded Chinese shares for three years in a row. With retail investors' pessimism over the market, they are still worrying about further yuan depreciation.

Markets are also parsing through mixed signals from Fed speak overnight.

Global equity index provider MSCI will add China A shares to two of its indices starting June 2018. But China's actual total weighting is closer to 17 percent.

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