China bashing gets a little tiresome for me. While there is so much to attack in terms of the quality(and accuracy) of information flow and data, the political process, the market structure of the economy, the access of investors to the economy…
China (FXI, quote) is a regular whipping boy for many who cannot even find it on the map. For the last 15 years we have marveled over the China growth story, feared the slowdown, championed for economic change that focused on consumption, and lived every day in fear of a Chinese debt bubble. Investors gaming for a 2 sigma macro event in China have been wrong for five years and counting.
On Wednesday afternoon China got a vote of support from the MSCI in the form of local A Shares inclusion in the after three years of being rebuffed by the governing body of “passive flow” money. Once again the critics are wondering how China with all of its market orchestrations, and lack of access could be given the green light by the white shoe MSCI?
It’s really simple – China is the second largest economy in the world, and its stock and bond markets are the second and third largest markets respectively in the world and yet they had not been represented in world indices. It’s time.
This is not the G8. This is not a gathering in Davos. We are not talking about the IMF who has pressure to add the Renminbi to the SDR structure. The MSCI is not a political organization. The MSCI is the largest passive index governing body which answers only to what it believes is in the best interest of global investors as determined by a fundamental, research driven approach. The MSCI breaks the world down across country indices and regional, indices and asset class indices. So the MSCI has spoken on China and the message is important even if it is not a significant event for fund flows overnight. China is getting recognition for moving their open market policies forward. Sentiment for Chinese equities overall ( and EM ) is enhanced by this vote.
What does the China A Share inclusion mean?
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Technically:
- MSCI Inclusion of 0.7% into the MSCI EM (EEM, quote), and it will be 2.6% of MSCI China, 0.8% of MSCI Asia ex-Japan Index
- 222 stocks will be included which is slightly higher than the 169 guided in March
- A Shares could be 20% of MSCI EM index by 2030 and China overall therefore could be 40% of the index….
- The announcement has little actual flow impact from the passive index tracking community ($14Bn of $2Trn tracking) but will lead to more active allocations from opportunistic players dedicated to EM
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Symbolically:
- Yes, MSCI is saying China is doing better on their market friendly policy improvements but irony is they are doing this in 2-stages because of liquidity issues still inherent in this market
- But this event along with the Bond Connect recently announced is very important for giving global investors access to China in the medium term
- Investors are looking for better yields – and Bond Connect gives global investors and opportunity to pick up yield and opportune time
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Bottom Line: Get China right and you get EM right. China is 28% of index now, and Asia is 63% of the Index overall, so make you wonder whether EM is really all about Asia? We spend so much time extrapolating on the politics in Russia and Brazil. Who cares?! Right now Brazil, South African, Russia, Mexico combined make up <20% of the MSCI EM. Why bother.
I’ll leave you with this: While we have spent much of 2017 foaming over FAANG stocks, Asian tech has been holding serve at least as well. Investors could make and argument that an investment in “STAAB” (Samsung, Taiwan Semi, Tencent, Alibaba, Bidu) is not only “higher growth” tech with similar disruptive qualities, but also gives exposure to the part of EM Equities you want to own, Asia. These five stocks make up approx. 16.5% of the MSCI EM.
Maybe it’s not only time to accept that Chinese equities are going mainstream(thank you MSCI), but it’s also time to look at your portfolio to make sure you haven’t missed the real tech rally.
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