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Firms disappointed by MSCI China decision


The recent announcement by MSCI in its 2016 Market Classification Review of its decision to delay including China A-shares in its indices has raised comments from firms investing in China. 

Danny Dolan, Managing Director of ETF distributor China Post Global, says: “Clearly, it was decided that additional steps are needed for full inclusion of A-shares in investor portfolios globally.
“Significant progress has been made already – the Chinese equity market is much more accessible today to international investors. Soon China will no longer be under-represented in global benchmark indices and investor portfolios.
“China is not only the second largest equity market globally; it is a market that offers great investment opportunities.
“Full inclusion is still a question of when, rather than if. What is certain is that when that happens, it will generate substantial capital inflows into China.”
Anthony Cragg, Senior Portfolio Manager at Wells Fargo China Equity Fund, Wells Fargo Asset Management comments: “The decision by MSCI to delay the inclusion of Chinese A shares into their benchmarks is, naturally, mildly disappointing for us and for other investors in the Chinese stock market. It is likely to have a short term negative impact on some A shares, especially those at the more speculative end of the spectrum, as some investors may have put on an ‘event-driven’ trade ahead of the decision, which they will now presumably exit. These trades were no doubt encouraged by the reasonable expectation among most commentators that this time around at least some proportion, perhaps 5 per cent, of A shares would be included.
“There are a number of reasons why we believe any such disappointment will be relatively mild and short-lived:
1. Although delayed, eventual inclusion is still clearly a question of ‘when’, rather than ‘if’. Whether this happens in 2017, 2018, or even 2019, should not make that much difference to the long term investor in China.
2. A 5 per cent inclusion, which is what many had expected, would have resulted in foreign inflows representing less than 1 per cent of the nearly USD3 trillion A share market free float. There is, in fact, an argument that when MSCI’s lingering concerns are finally addressed, it would be preferable for inclusion to begin with a more meaningful percentage of perhaps 10 per cent, or even 20 per cent.
3. Even without A share inclusion, China’s weighting in global indices continues to grow inexorably; from 0 per cent as comparatively recently as 1989, to around 25 per cent in the Emerging Markets benchmark today. The most recent increase comes from the significant inclusion of Chinese ADRs.
4. MSCI’s decision to delay should encourage further financial reform in China and the implementation of other measures to protect the interests of foreign investors.  
5. While A shares will remain out of benchmark for the time being, key points for the global investor include that there are a number of attractive companies among them trading at reasonable valuations, and that the domestic share market has increased its accessibility in recent years and will continue to do so.  Therefore, we view any correction based on MSCI’s decision as a buying opportunity, especially in our favoured “New China“ sectors, such as environment, healthcare, education, internet, leisure and travel. 

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