Andrew Gillan, Head of Asia (ex Japan) Equities, explains the near term impact of MSCI’s decision to include China A-shares in its benchmark emerging markets index.
In the short-term, we expect minimal impact from the MSCI’s inclusion of China A-shares on Asian markets. Blue chip China A-shares have already outperformed this year, partly in anticipation of this event. You may even see some profit taking as a result.
It’s important to note, however, that this is a crucial first step for MSCI and acknowledges the progress that China has made in addressing their concerns at the previous three annual index reviews.
Given that inclusion will only be implemented in two stages in 2018 and on a 5% partial inclusion basis, this will likely have limited impact on benchmarks initially, but continue to increase China’s weighting in both Asia and emerging market benchmarks over the next decade as the inclusion factor is increased.
One risk we would flag for investors is that China will likely continue to increase its weight in regional benchmarks as a result of this decision so there is more concentration risk at a country level particularly for those investors gaining exposure to the region via ETFs and passive allocation. Some of our best investments over the last three years have been China related shares and we will continue to find great opportunities there. We will also look to provide our clients with diversification by country and sector rather than be led by index weights.
As such, we don’t foresee immediate impact on our own strategy as we already research and invest in A-shares, but I expect us to increase our allocation to A-shares over time given the depth and choice of companies available in the market.
An important point to note is that as active managers, we already have some China A-share exposure across all 3 strategies on the desk – Asian Growth, Asian Dividend Income & China portfolios as we are already willing to invest in all Asian markets regardless of the index weights.