Peru may be out. Pakistan may be in. And China could have more clout than it’s ever had.
Adding mainland-traded Chinese stocks to its global indexes is the most consequential move MSCI would make as part of its annual review, the results of which will be unveiled on June 14. Other potential changes include adding Pakistan stocks to the gauge, while excluding Peruvian equities.
“Index changes have material effect on flows as well as what the investable universe is for investors globally,” said Brendan Ahern, chief investing officer at KraneShares in New York.
Assets worth $10.5 trillion are benchmarked to MSCI’s indexes of which $1.5 trillion are invested in the developing world, according to the New York-based firm. About $36.9 billion are tied to emerging-market exchange-traded funds and $435 million are in ETFs tracking frontier markets, according to Deborah Fuhr, co-founder and managing partner of independent ETF research firm ETFGI in London.
Here’s what to look out for:
China
MSCI has been considering whether to include mainland-traded Chinese stocks since 2013. It twice deferred a decision, citing concerns about market accessibility among the reasons. Issues have included foreign investors facing investing quotas, the need for improvements in liquidity and further clarification of share-ownership rules.
Goldman Sachs Group Inc. analysts revised their call this week on the odds of A-share inclusion to 70 percent from 50 percent, citing the Chinese government’s latest rules restricting trading halts and its effort to clarify beneficial ownership rules. Remaining obstacles include a 20 percent monthly fund repatriation limit, anti-competitive clauses on index products and daily quota limits on a cross border stock program, Goldman’s team led by Kinger Lau wrote in a report Tuesday.
More on Goldman’s analysis of the chances of China’s mainland stocks being included in the MSCI index can be found here.
Including 5 percent of the stocks listed in Shanghai and Shenzhen would increase China’s weighting in the Emerging Markets Index to 27.3 percent from 25.9 percent, according to MSCI’s roadmap. A full inclusion would raise that figure to 39.9 percent.
Ten of 23 strategists and fund managers surveyed by Bloomberg expect MSCI to include the Chinese shares. Five said the index provider wouldn’t, while eight said it was hard to tell. UBS Wealth Management analyst Hyde Chen said there’s a 50 to 60 percent probability of a partial including in June as regulators need another six to 12 months to address remaining issues.