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Macro Alerts

All change for China A-shares and MSCI?

15 Jun 2017
WisdomTree


China A-shares, with respect to global equity benchmark indices, have been problematic for some investors in terms of market accessibility and index inclusion. 

 

The evolution of the relatively restrictive Qualified Foreign Institutional Investor schemes—QFII and RQFII—combined with the relatively new Stock Connect schemes for both Shanghai and Shenzhen stocks has created a material change to investors’ ability to trade A-shares. These moves have created an environment of more flexible market access which has increased the likelihood that, on a revised and limited basis, MSCI may include A-shares in their benchmark indices. It is important to note that the current proposal is substantially different from the previous attempts and only creates a modest inclusion of A-shares as opposed to a comprehensive approach. 

 

The likely inclusion by MSCI of A-shares highlights the benefits of existing index strategies such as the S&P China 500 that feature a much broader coverage of Chinese equities and share classes. Currently most investors, hampered by adequate access to on-share China equities hold mainly Hong Kong listed H-shares and US-listed N shares. These types of index exposures whilst are operationally easy to manage, fail to capture the full opportunity set of the rapidly changing and dynamic Chinese economy.

 

In contrast to previous MSCI proposals, which envisaged adding 448 A-shares and which would’ve led to more substantial changes, the current proposal only entails adding 169 A-shares with a 5% inclusion factor. The key change is that only large cap companies that are accessible through the Shanghai and Shenzhen Stock Connect programmes would be eligible. Crucially, companies that already have H-shares in the MSCI China index would not have their A-shares included. Whilst an interesting compromise, the resultant index, almost by design, is less inclusive than the approach taken by S&P in constructing the S&P China 500 and results in only minimal change. The weight of the new A-shares to be included in the index is only 1.8%.

 

Table 01. MSCI China Index breakdown of number of constituents and index weight (current versus new)

MSCI China

Number of constituents

Index weight

Current

New

Current

New

A-Shares

0

169

0.0%

1.8%

B-Shares

2

4

0.2%

0.4%

H-Shares

70

86

38.6%

37.6%

Red Chip

30

38

16.9%

16.6%

P Chip

34

50

21.5%

21.8%

Overseas

14

18

22.8%

21.8%

Total

150

365

Source: MSCI China, WisdomTree. Data as at 3 March 2017.

 

S&P’s solution is to consider the entire investable universe of Chinese equities, ranging from A-shares and B-shares, H-shares, overseas listings (typically NYSE or Nasdaq), and P Chip and Red Chips. At its heart, this index is designed to match the sector breakdown of the S&P Total China Broad Market Index (BMI) which combines the constituents of the S&P China A BMI and the S&P China BMI. This unique approach to Chinese equities sector weighting means the S&P China 500 has been designed from the outset to combine liquidity and sector representation. In terms of index construction, all share classes that qualify are included and companies are ranked by market capitalisation within each sector with the aim to approximate the broad market’s sector weights.

 

One aspect of the sector weights within the S&P China 500 index is that it more closely measures the Chinese economy—especially as it encompasses the structural shift with a greater focus on consumer spending and technology as opposed to older state-owned enterprises and financials. In terms of consumer-oriented sectors the S&P China 500 has an exposure of 23.4%; this compares to the 14.7% in the current MSCI China index which would potentially rise to 15% with the inclusion of a broader range of constituents including A-shares. With respect to Financials and Real Estate sectors, the S&P China 500 index at 26.3% is underweight relative to the current MSCI China index and the potentially expanded index where the weight is approximately 29.6%.

 

Table 02. S&P China 500 Index sector breakdown versus MSCI China 

S&P China 500

MSCI China Index

Proposed

Current

Consumer Discretionary

12.57%

10.08%

10.03%

Consumer Staples

5.52%

2.54%

2.40%

Energy

3.75%

5.93%

6.00%

Financials

21.83%

25.47%

25.52%

Health Care

5.30%

2.36%

2.31%

Industrials

13.81%

6.23%

6.05%

Information Technology

18.15%

31.57%

32.01%

Materials

8.91%

1.95%

1.84%

Real Estate

4.44%

4.14%

4.08%

Telecommunication Services

2.59%

6.80%

6.89%

Utilities

3.13%

2.93%

2.88%

Grand Total

100.00%

100.00%

100.00%

Source: MSCI China, WisdomTree. Data as at 3 March 2017.

 

Overall investors looking to access broad China equities, without waiting for a gradual and piecemeal approach by MSCI, may look consider the S&P China 500 index that already offers a complete solution and one that can be accessed through a physical UCITS ETF.

 


The opinions expressed in this article are the author's own and do not necessarily reflect the view of WisdomTree. 

 

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, its officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. However, back tested performance is purely hypothetical and solely for informational purposes. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance.

 

INDEX PERFORMANCE DISCLOSURE

 

The S&P China 500 was launched on August 28, 2015. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index methodology details are available at www.spdji.com. Please read S&P Dow Jones Indices LLC’s DISCLAIMERS.

 

DISCLAIMERS

The S&P China 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by ICBC Credit Suisse Asset Management (International) Co., Ltd. (ICBCCSI), © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.  S&P, SPDR and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”). DOW JONES is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks together with others have been licensed to S&P Dow Jones Indices LLC. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively “S&P Dow Jones Indices”) do not have the necessary licenses. All information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past performance of an index is not a guarantee of future results. Neither S&P Dow Jones Indices LLC, Dow Jones, S&P, and their respective affiliates (“S&P Dow Jones Indices”) nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

In this document, ICBC Credit Suisse refers to ICBC Credit Suisse Asset Management Company Limited and its subsidiary, ICBC Credit Suisse Asset Management (International) Company Limited (“ICBCCSI”). ICBCCSI is a regulated entity under the Hong Kong Securities and Futures Commission.


No account has been taken of any person’s investment objectives, financial situation or particular needs when preparing this document. This is not an offer to buy or sell, or a solicitation or incitement of offer to buy or sell, any particular security, strategy, investment product or services nor does this constitute investment advice or recommendation.

The views and opinions expressed in this document, which are subject to change without notice, are those of S&P Dow Jones Indices LLC, ICBC Credit Suisse and/or its affiliated companies at the time of publication. While S&P Dow Jones Indices LLC, ICBC Credit Suisse and/or its affiliated companies (collectively as “we” or “us”) believe that the information is correct at the date of this presentation, no warranty of representation is given to this effect and no responsibility can be accepted by us to any intermediaries or end users for any action taken on the basis of this information. Some of the information contained herein including any expression of opinion or forecast has been obtained from or is based on sources believed by us to be reliable as at the date it is made, but is not guaranteed and we do not warrant nor do we accept liability as to adequacy, accuracy, reliability or completeness of such information.  The information is given on the understanding that any person who acts upon it or otherwise changes his or her position in reliance thereon does so entirely at his or her own risk without liability on our part.

This material has not been reviewed by the Hong Kong Securities and Futures Commission.  Issuer of this material: ICBC Credit Suisse Asset Management (International) Company Limited. This material shall be distributed in countries where it is permitted.

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