Chinese shares jumped on Friday, outpacing Asian markets such as India and the Philippines, after global index provider MSCI announced it would increase the weightage of so-called A-shares in its global indices.
The CSI 300 Index, a gauge for the performance of leading companies listed in Shanghai and Shenzhen, rose more than two per cent.
In comparison, the MSCI Asia Pacific Index rose just 0.2 per cent. India’s Sensex went up 0.6 per cent while Philippines’ PSEi Index fell nearly a per cent.
MSCI’s decision to boost China stocks’ weight in global benchmark indexes is expected to impact overseas flows into other Asian and emerging markets over time.
The index provider will be increasing China’s inclusion factor from 5 per cent to 20 per cent. This will lead to an increase in weightage of stocks listed in Mainland China to 3.3 per cent from the current 0.72 per cent by November. The adjustment may trim weightage of other countries, including India.
Experts say the move could bring in up to $15 billion passive flows into Chinese stocks over the next few months. Another $25 billion could come on the active flow side if global asset managers adjust their A-share allocations to match the inclusion factor change.
The decision follows consultations with institutional investors and other market participants worldwide.
“We anticipate at least $60-100 billion of active flows into A-shares in 2019 due to the Chinese government’s determination to further open up the A-share market, global investors’ long-term commitment to A-share allocation and A-shares’ better positioning, with multiple market impacting factors turning positive. They include more attractive valuations, better visibility into the government's easing policy, and more realistic consensus on earnings forecasts,” observed the Morgan Stanley report.
Experts say this decline could cost India anywhere between $1 billion and $5 billion in global exchange-traded fund (ETF) flows. In addition, actively-manage funds could also see higher flows to China at the cost of markets like India.
In a note, Citibank said India could see outflows of up to $5 billion due to the A-share inclusion impact. According to the brokerage, India’s weighting in the MSCI Emerging Markets Index could decline about 120 basis points by 2025 from about 8.5 now. In the immediate term, however, experts don’t see a significant impact.
“The increase in the inclusion factor for China-A shares will affect India but the impact may not be meaningful,” said UR Bhat, managing director, Dalton Capital Advisors (India).
On an absolute basis, FPI flows into India have been drying up in the last few years. Since 2015, average FPI flows on an annual basis have been about $2 billion, down from an average $20 billion for the three-year period ending 2014. Last year, FPIs pulled out $4.5 billion from the domestic equity market.