20160616-高盛-China_Musings__No_A-share_inclusion_leads_to_an_unfavorable_tactical_backdrop,_but_not_the_end_of_the_day_12页_396kb

Portfolio Strategy Commentary Summary

Core Content

This document provides an analysis of the MSCI decision not to include China A-shares in the MSCI Emerging Markets Index for the 2016 review, emphasizing the importance of the inclusion roadmap over timing. It outlines the implications of the decision on investor sentiment and market flows, while also highlighting the recommended investment strategies for engaging with the Chinese equity market.

Main Points

MSCI Decision Overview

• On June 14, 2016, MSCI announced that China A-shares would not be included in the MSCI Emerging Markets Index.
• This was the third consecutive year MSCI had decided against inclusion.
• MSCI indicated that inclusion could still happen in an off-cycle announcement once certain issues are resolved.

Investor Expectations and Market Response

• The decision was not a complete surprise, as prior analysis had increased the probability of inclusion from 50% to 70%.
• High expectations were evident, with significant inflows into A-share ETFs and strong net buying via Stock Connect.
• The outcome may lead to short-term selling pressures due to unmet expectations, though the impact is expected to be less severe than in 2015 due to more reasonable valuations.

Unresolved Issues

• Capital Mobility Restrictions: Monthly repatriation limit of 20% for QFII remains unchanged.
• Trading Uncertainty: Daily quota limits on Stock Connect are still pending clarification.
• Anti-competitive Clauses: Index-linked financial products must be pre-approved by Chinese exchanges.
• Voluntary Suspensions: Practices that hinder market liquidity and replication are still in place.

Roadmap and Timing

• The decision suggests that MSCI prioritized unresolved issues over those that have been addressed.
• The authors recommend a medium-term view, noting that inclusion may occur in the near future if key issues are resolved.
• They estimate that a 5% inclusion factor would result in a modest impact on index weights and flows, with China A-shares representing about 1.1pp of EM and 0.7 days of turnover.

Strategic Recommendations

• Investors should focus on the long-term roadmap rather than the timing of inclusion.
• Three top-down strategies are suggested:
  1. Index Heavyweights: A-share listed index heavyweights to gain exposure to inclusion.
  2. GARP Stocks: Select growth at a reasonable price (GARP) stocks that align with international investment criteria.
  3. Shenzhen-listed 'New China' Stocks: Stocks in Shenzhen that represent unique themes and have strong fundamentals.

Key Information

Impact on Index Weights

• At a 5% inclusion factor, China A-shares would represent 27% of the MSCI Emerging Markets Index and 1% of the A-share weight.
• The estimated net inflows for MSCI China A International Index constituents would be US$17bn.

Historical Context

• Korea and Taiwan had lower inclusion factors initially and took years to reach full inclusion.
• The authors suggest a gradual increase in inclusion factor, with an average annual rise of 10% in the past.

Exhibit Highlights

• Exhibit 1: Shows that some MSCI concerns have been addressed, but others remain unresolved.
• Exhibit 2: Illustrates the impact of a low inclusion factor on index weights and flows.
• Exhibit 3: Indicates that the largest reductions in index weights would occur for Korea, Taiwan, and India, but selling pressures would be minimal.
• Exhibit 4: Suggests that the market correction in 2015 was more severe due to overvaluation.
• Exhibit 5: Highlights GARP as a top-performing strategy in the A-share market and the potential of 'New China' themes in Shenzhen.
• Exhibit 6: Lists A-shares under GS/GH coverage that align with preferred themes and fundamentals.

Conclusion

The authors conclude that while the MSCI decision is disappointing, it is not the end of the story. The inclusion of China A-shares in the MSCI Emerging Markets Index is still on the table, contingent on resolving the outstanding issues. Investors should focus on the long-term roadmap and consider the three recommended strategies for engagement with the Chinese equity market.