Ready, set, buy.
Investors will soon have an opportunity to enter into more than 200 large-cap stocks in the world’s second-largest economy. They will just have to wait a few more months to jump into the first-phase buying spree, or “inclusion process,” slated to kick off in June.
Global index provider Morgan Stanley Capital International (MXEF, Financial) is adding a total of 222 domestic Chinese stocks, known as “A shares,” to its emerging markets index. MSCI made the announcement last June.
The additional shares will represent approximately 0.73% of the MSCI Emerging Markets Index. Estimates show that, over time, MSCI could hold as much as $18 billion worth of these stocks.
The MSCI Emerging Markets Index captures the performance of large- and mid-cap stocks across 23 emerging market countries.
The A shares will also be available, in some cases, on the MSCI ACWI Index, which follows stocks in 23 developed markets and 23 emerging markets, according to industry reports.
The MSCI indexes already include Chinese stocks listed offshore, but not those trading on the Shanghai and Shenzhen exchanges, known as A shares. The MSCI Emerging Markets Index has more than 27% exposure to Chinese stocks in tech giants like Tencent (TCEHY, Financial), Alibaba (BABA) and Baidu (BIDU).
As of March 13, there were also 235 Chinese A shares in the MSCI China Provisional Index, records showed.
The new investment opportunity is a result of a loosening of the local Chinese stock exchanges, according to MSCI.
MSCI was required to jump through some hoops, including pre-approval requirements that restricted the creation of such index-linked investment vehicles.
The process began in 2013 when MSCI put the China A shares on the 2014 market classification review list.
China apparently also played ball by improving its accessibility conditions.
Institutional investors, which are heavily invested in MSCI index funds, were in favor of the arrangement, according to MSCI.
Possible surge
The emerging markets haven’t been friendly to investors lately. MSCI’s benchmark has had some of its worst performance in years. Among the worst performers were Chinese stocks. For example, China’s manufacturing sector in February reported the weakest earnings in more than two years.
The world’s second-biggest economy could also be subject to more regulatory scrutiny this year, further eroding performance in the market.
The U.S. Federal Reserve’s move to raise interest rates also didn’t play well on the global sector due to fears of rising borrowing costs.
But some have noted potential promise ahead. The industry is anticipating A shares of domestic stocks from China surging after the slowdown. The recent selloff, some believe, is the result of a correction after a period of strong returns.
Several Asian stock markets, including China, Korea and India, are undervalued based on Warren Buffett (Trades, Portfolio)’s market indicator.
How it got started
MSCI apparently performed an in-depth review of the Chinese stocks. It completed a detailed analysis of the China A shares inclusion. In May, the inclusion in the emerging markets index will have an inclusion factor of 2.5%. It will increase its inclusion factor to 5% in August, records show.
Last summer, the MSCI Emerging Markets Index had a total capitalization of $4.6 trillion with 830 constituent stocks. It includes investments in countries like Mexico, South Korea, Taiwan, India, Brazil and others.
MSCI has spent four decades providing research-based indexes and analytics to the world’s investors. The benchmark index and analytics provider says it serves 97 of the top 100 largest money managers.
