China A-shares inclusion in MSCI indices to redefine emerging market investing

Commenting, James Butterfill, Head of Research and Investment Strategy, ETF Securities said:

“Some of the obstacles in the original inclusion proposal discussed three years ago have been addressed. For example, concerns over repatriation limits of the money invested in A-shares can be addressed by using the Stock Connect programme for certain eligible stocks. This was a key element for the successful inclusion of China A-shares by MSCI this time as offshore investors can now buy China A-shares listed in Shanghai and Shenzhen through this programme on the Hong Kong Exchange. This has boosted access to certain domestic stocks for offshore investors whilst the RQFII quota programme continues to operate to allow for investment in a wider pool of China A-shares.

“We believe A-shares price-to-earnings ratio relative to H-shares show that A-shares is currently fairly valued. With the size of the inclusion still representing a small proportion of the overall size of the Chinese market capitalisation, we believe a solid recovery of Chinese manufacturing PMI based on a credible reform agenda will provide stronger support for A-shares over the longer run.”

Working in partnership with E Fund Management, one of China’s top asset managers, ETF Securities launched a China A-shares ETF in 2014, which was Europe’s first physically replicated ETF to track the MSCI China A Index. Prior to that, foreign investors had limited access to China’s domestic equity markets as most investors were only able to gain exposure through a limited number of Chinese stocks listed on overseas markets such as the Hong Kong and New York stock exchanges.

Howie Li, CEO, Canvas, ETF Securities said: “We believe that the companies within the MSCI China A Index will benefit from a positive outcome following yesterday’s announcement. The investment landscape for emerging markets is now confirmed to change with the inclusion of China A-shares into MSCI’s Emerging Market benchmark. Many investors will need to redefine their EM strategies going forward as demand for domestic Chinese equities is likely to increase.

“As the landscape for emerging market investing changes and in anticipation of the inclusion of a wider range of A-shares in the future, our partnership with E Fund Management continues to have the flexibility to provide investors with access to China A-shares through both the Stock Connect programme and the RQFII quota system.”