After months – in fact, years – of anticipation, global market index provider MSCI is going to finally announce this Friday whether it’s going to start including China’s A shares market in its indexes.
I know – this topic sounds like a panel at a Geek Fest for stock market investors. But there is money to be made in these details, so bear with me for some background.
And if you already know all this because you’ve read about it here or in the latest issue of The Churchouse Letter, you can skip ahead to see a few ways to invest in A shares.
Why MSCI matters
MSCI is the world’s most important index provider. Its decisions affect trillions of dollars of trading in the stock market. Fund managers and investors use it as a benchmark to build emerging-market portfolios. For example, MSCI’s Emerging Markets Index, which includes 23 countries, is tracked by about $1.5 trillion of investment funds. So when MSCI adds or removes stocks or countries from its index, a lot of money – not overnight, but over weeks and months – follows it. (Index funds and ETFs invest in a way that mimics indices, like (for example) the S&P 500 or MSCI indices. And even most so-called “actively managed” funds are closet index trackers.)
The MSCI Emerging Markets Index already includes some of China. But MSCI has so far included only Hong Kong-listed H shares (the Hong Kong-listed shares of Chinese companies) or shares of Chinese companies listed on U.S. exchanges. Together, these shares account for just over a quarter of the entire emerging markets index. But none of them is A-shares trading on a mainland China exchange (we’ve written about this before here and here.)
A shares aren’t even on the bench
But Chinese shares traded in China – the world’s second-largest economy (in terms of combined value) with the world’s second-largest stock market – are currently not reflected in the major MSCI market indices. MSCI has talked a lot about it for years, and a lot of people thought that MSCI would move to include A shares last year. But it decided not to. Now, all eyes are focused on Friday.
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But before we get too excited about a tsunami of index cash flooding China’s A share market, a few words of caution. The reality is that the current MSCI proposals for including A shares in their indices are modest. They’d result in something closer to a trickle of capital rather than a 10-meter water wall of money.
Why? MSCI takes things one step at a time. Stock market volatility (huge swings in share prices) because of changes in index allocations wouldn’t be good for anyone.
A trickle, not a flood
So MSCI’s proposals would mark a big step towards making China a more accepted member of the global stock market club – without making it the captain of the team on its first day. So if on Friday MSCI announces that A shares will join the team, changes would look like this:
- The new MSCI Emerging Markets Index will include the same 169 companies and increase the A-share component of the Index from 0 percent to 0.5 percent. This will bring the total China component of the MSCI Emerging Markets Index to about 28.6 percent, still the biggest country weighting in this index.
- The new MSCI China index (which tracks only Chinese shares) will include shares of 169 A-share companies which represent just 1 percent of the entire index. This is tiny. (The rest are H shares, and the shares of Chinese companies traded in the U.S. and elsewhere.)
- For the MSCI Asia ex-Japan index, China’s share will rise slightly to just over 33 percent, and China would remain in the index, again the largest single country weighting.
Will MSCI give China the nod? In the past, issues of market access – that is, it’s been difficult for foreign investors to buy A shares – has stood in the way of A shares joining the MSCI indices. China’s government has made a number of efforts to make its markets more transparent and accessible. The question is whether it’s enough.
The easiest way to invest in China’s A shares is via ETFs. Some of the biggest ones available on major exchanges are below. (Not all China ETFs are the same. Far from it. Subscribers to The Churchouse Letter should see the May issue for our preferred fund.)
Again: Don’t invest in any of these expecting a big bump if MSCI decides on Friday to let A shares into its indices. That’s not going to happen. There are lots of reasons to invest in China (such as the growth of its middle class, to name just one), and what MSCI does right now isn’t going to change things a lot.
But MSCI is the global stock market barometer of what’s “in”. China’s stock market is already the world’s second largest, but – in part because of MSCI’s reluctance to let A shares in – not many foreign investors have much exposure to A shares. As that changes over time, the funds in the table above are going to benefit.
Good investing,
Kim Iskyan
Publisher, Stansberry Churchouse Research
P.S. A lot of investors can’t stand China. But as we explain in the latest Churchouse Letter, China is a huge opportunity. (The last time that Peter Churchouse called a buy on China, the market doubled in the space of a year… Peter knows China.) And A shares are one way to invest. Learn about another one here .
