20180418-中国银河国际证券-STRATEGY_NOTE__UPDATE_ON_MSCI_A-SHARE_INCLUSION_10页_1020kb

MSCI A-Shares Inclusion Update Summary

Core Content

This document provides an update on the inclusion of A-shares in the MSCI Emerging Markets Index and offers investment insights for investors, particularly those with limited experience in the A-share market. It outlines the expected fund inflow, the impact of the inclusion on market valuation, and highlights key stocks that may be of interest.

Main Points

• Inclusion Timeline: A-shares will be included in the MSCI Emerging Markets Index in two stages: May 2018 (2.5% of free float) and August 2018 (5% of free float). This will result in A-shares representing 0.81% of the index by September 2018.
• Estimated Fund Inflow: Based on the inclusion of 236 large-cap A-shares, approximately US$12bn in passive funds is expected to flow into the A-share market during the initial stages. However, the long-term inflow could reach US$249bn if full inclusion is achieved, which may take 8-10 years unless China accelerates capital account liberalization.
• Market Valuation: After a 15% correction since late January, the A-share market has become more attractive. The forward PER of the Shanghai Composite Index is at 11.6x, near the 5-year average of 11.4x and the low-end of the valuation range following the 2015 market collapse.
• Sector Performance: The healthcare sector is the only one that has posted a positive return year-to-date (6.87%). Other resilient sectors include materials (due to supply-side reforms) and energy (due to oil price rebounds). The weakest sectors are consumer discretionary, industrials, and financials due to profit-taking.
• Stock Selection for New Investors: To simplify the investment process for new investors, a list of 10 large-cap A-share companies is provided, selected based on equal weighting and covering major sectors. These companies are highlighted for their potential inclusion and performance.

Key Information

10 Large-Cap A-Shares for New Investors

Sector Breakdown and Performance

MSCI China A Inclusion Index Sector Performance (YTD)

• Healthcare: +6.87%
• Materials: Resilient due to supply-side reforms
• Energy: Resilient due to rebound in oil prices
• Consumer Discretionary: Weak due to profit-taking after a strong performance last year
• Industrials: Weak due to underperformance in construction and railway sectors
• Financials: Weak due to profit-taking after re-rating

Sector Breakdown by Market Cap

• Consumer Staples: High weighting
• Financials: High weighting
• Consumer Discretionary: High weighting
• Materials: Moderate weighting
• Energy: Moderate weighting
• Utilities, Energy, Real Estate, Telecommunication Services: Low weighting (combined about 11.4%)

Investment Implications

• The inclusion of A-shares is expected to attract significant passive fund inflows, enhancing the market's liquidity and appeal.
• The current valuation of A-shares is considered attractive for long-term investors, with forward PERs aligning with historical averages and near the low end of the valuation range.
• For new investors, focusing on the 10 large-cap A-shares listed is recommended to avoid the complexity of stock selection while maintaining alignment with the index weighting.