Australian shares will now face more competition for overseas interest following the decision by the MSCI index group to include some big Chinese stocks in its key emerging markets index.
MSCI had declined to add Chinese shares to its index for the past three years, but following moves by China to improve governance in some areas, it reversed those negative calls.
MSCI also trimmed its proposal, cutting the number of shares to be included in the index and the weighting to make the China move more palatable to big investors and other markets.
The move means mainland stocks, known as A-shares, will from next year be included in MSCI’s flagship emerging markets index, obliging the managers of an around $US1.5 to $US1.6 trillion of investment funds that track the index to buy mainland shares, according to estimates from Reuters.
MSCI says it will add 222 China A Large Cap stocks on a gradual basis from 2018. The move will pressure markets, especially those with exposure to China, such as Australia, but the gradualness of the move should prevent any wild swings.
Watch for some weakness in the value of the Aussie dollar over time as well as investors sell local investment to redeploy funds into China to achieve index weighting. tracker or passive funds will be most notable..
“International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion,” Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, said in a statement announcing the much anticipated decision.
“The expansion of Stock Connect has been a game changer for the market opening of China A shares," he said, referring to a program giving foreign investors access to the Shanghai and Shenzhen stock markets through Hong Kong.
MSCI’s decision to add the A shares to its widely tracked Emerging Markets Index could move as see up to $US400 billion of funds from asset managers, pension funds and insurers move to mainland China’s equity markets over the next decade.
