Late on 14 June, MSCI, a provider of global equity indexes, announced that it would delay including China A-shares in the MSCI Emerging Markets Index. This was the third year running in which MSCI has denied China’s onshore equity markets entry into the index.
MSCI acknowledged that China had made significant progress towards addressing its previously cited concerns: issues regarding beneficial ownership, regulations on trading suspension, and the allocation and capital mobility restrictions for qualified foreign institutional investor (QFII) quotas. However, the index provider still believed that the 20% monthly repatriation limit remained a significant hurdle for investors that may be faced with redemptions. The firm also stated that its concerns about local exchanges’ pre-approval restrictions on launching nancial products remained unaddressed.
Both international investors and local regulators have been impatient for the MSCI nod, which would be a signi cant step towards the internationalisation of China’s largely closed capital markets. Despite many being disappointed by this decision, the press release from MSCI is positive. It said that it did “not rule out a potential off-cycle announcement should further significant positive developments occur ahead of June 2017.” We believe that the Chinese authorities will continue to work with MSCI to achieve inclusion in the MSCI Emerging Markets Index, as this is a key area of focus for the government. It is less a case of if A-shares become included, but when.
Ultimately, we believe that China is too big to remain out of MSCI’s flagship emerging markets index, to which an estimated US$1.5 trillion is benchmarked. The People’s Republic has the world’s second largest economy (almost US$11 trillion) and equity market (total market capitalisation of approximately US$7 trillion) and cannot be ignored.
We believe that the A-share market is changing rapidly and has an abundance of investment opportunities, with over 4,000 companies listed. As China rebalances its economy, and services grow faster than heavy industry, the equity market increasingly represents a new consumer-facing Chinese economy. We believe there are manifold opportunities in sectors and services such as food producers, automobiles, appliance manufactures, leisure and gaming companies, pharmaceutical and healthcare. And not forgetting some of the world’s most innovative internet companies.
Although MSCI’s decision is not necessarily the one we were expecting, we continue to build and invest in the 4Factor EquityTM China team of highly capable and talented investment professionals focusing on the domestic A-share market. We have been investing in the country for almost two decades and have experience and expertise to enable us to identify a large number of good-quality companies with good growth at attractive valuations. Now, more than ever, we are sticking with our belief that early moving investors are likely to reap long-term rewards.
Greg Kuhnert is a portfolio manager and financials sector specialist in the 4Factor Global Equity team at Investec Asset Management.