China and MSCI EM Index

China and MSCI EM Index

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Shanghai A-Shares

Shanghai A-shares rallied up a storm in brisk trading yesterday as traders anticipated an inclusion of China A-shares into the MSCI EM series of indices. The Shanghai Composite and the Shanghai A closed up more than 2%, with the China A50 June futures adding a solid 6%. While many eyes will be focused on the decision tonight, the reaction of equities prices there may have already factored in the positives of this possible announcement. The rationale for stocks to go up on the back of an inclusion is that ETFs and investment funds that track this index will then have to adjust accordingly, to account for the increased weight of Chinese A- shares into the index. If Chinese A-shares were to be included, then these tracker funds would have to buy ’A’ shares, adding to their overall funds position. The amount of ‘new money’ that may be committed to Chinese ‘A’ shares here is not small. Modest estimates for an initial amount to be added come in at over USD200 billion, or roughly 10-15% of global Emerging Markets funds. That being said, let’s be clear. This adjustment will mostly only take place on the date of inclusion, not on the date of announcement, as may be the case tonight. Hence, with so much hype anticipating this move already, are we at risk of a buy-on-the-rumour-sell-on-the-news scenario should there be an announcement for inclusion? Worse still, what if, on the other extreme, MSCI decides to defer the decision to include ‘A‘ shares in the EM indices this time round, for whatever reason? Could such a move be the straw to break the camel’s back, for the short term at least? Clearly though, most of the action yesterday was foreign-led buying. In fact, locals were seen to have been sellers all day, with the Shenzhen markets down roughly 2%. Worse off was the speculative Chinext index, which tumbled more than 4.5%.
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