June 22, 2017—What did MSCI decide?
MSCI, the principal international equity benchmark index provider, has decided for the first time to include some Chinese “A” shares in its emerging markets (EM) index. The decision goes into effect June 2018.
“A” shares are listed on the Shanghai and Shenzen stock exchanges. Historically, the EM index has included only those Chinese stocks listed on the Hong Kong exchange or which have ADRs traded in the United States. Accessibility, liquidity, transparency, and currency convertibility have all been issues that have prevented the inclusion of “A” shares.
MSCI decided to include only those “A” shares accessible to international investors through the “Stock Connect” system between China and Hong Kong. Inclusion is scaled to the daily limits on trading volumes through the “Stock Connect” system.
MSCI decided to exclude small- and mid-cap stocks as well as those subject to trading suspensions. These exclusions should help to shield the EM index from Chinese A-share volatility.
Why are the consequences of the MSCI decision?
The MSCI EM index forms the basis for most market-cap-weighted emerging markets equity ETFs and passive funds. Many billions of dollars will flow into the EM index as a result of this decision. In addition, active EM equity managers are more likely to view “A” shares as within their eligible universe.
The decision immediately results in the addition of some 222 Chinese “A” shares to the EM index. This decision will increase the Chinese weight in the index from the current 26.7% to approximately 27.4%. The next largest weights in the index are South Korea at 15.4%, Taiwan at 12.1%, and India at 9.8%.
While today’s MSCI action may seem limited and incremental, it potentially opens the path toward much greater Chinese weight in EM ETFs and passive funds. If limits on Stock Connect trading volumes are substantially increased, or are eliminated altogether, MSCI will add even more Chinese “A” shares to the EM index. Eventually, the Chinese weight in market-cap-weighted ETFs would exceed 30% and may even reach 35%.
We are currently overweight emerging markets equities. Our positive view is informed by the progress of economies and equity markets in the broader Asia ex-Japan region, including China. Of course, we continue to monitor Chinese economic, political, and equity market developments, to ensure that our overweight remains justified.
Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management and other services. International corporate and institutional services are offered through Wilmington Trust Corporation’s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC.
These materials are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. M&T Bank and Wilmington Trust have established information barriers between their various business groups. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports.
The information on Wilmington Wire has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation, and particular needs. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will succeed.
Any investment products discussed in this commentary are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by M&T Bank, Wilmington Trust, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested. Some investment products may be available only to certain “qualified investors”—that is, investors who meet certain income and/or investable assets thresholds. Past performance is no guarantee of future results. Investing involves risk and you may incur a profit or a loss.
Any positioning information provided does not include all positions that were taken in client accounts and may not be representative of current positioning. It should not be assumed that the positions described are or will be profitable or that positions taken in the future will be profitable or will equal the performance of those described. Positions described are illustrative and not intended as a recommendation outside of a managed account.
Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs that would reduce returns.
Third party trademarks and brands are the property of their respective owners.