China's A-Shares Not Yet In Global MSCI Indices; Wealth Managers Unfazed

Tom Burroughes

11 June 2015

Wealth management firms so far appear relaxed about a decision this week by market benchmark group MSCI announced that they would defer including China A-shares into their benchmarks, citing issues around access to the market. Whilst there could be some short-term disappointment on the part of domestic retail investors around this decision, it is not a surprising decision and we don’t feel it will be a major market-moving event,” Sutherland said.

“Accessing the China onshore market has become easier since the development of the Hong Kong-Shanghai Connect programme. Previously you could only access the A-share market if you had a Qualified Foreign Institutional Investor quota or Renminbi Qualified Foreign Institutional Investor quota, both of which are limited in size and do not offer daily liquidity,” he continued.

“However, the Connect programme still has obstacles to access such as daily and aggregate quota, concerns over beneficial ownership and rights to capital distributions, and issues around pre-funding and pre-delivering for purchases and sales. Also, not all Shanghai A-shares are included, and for now, the other A-share market, Shenzhen, does not have a connect programme – although that is expected to be announced soon,” Sutherland said.

The parties with most at stake in such index classifications are passive funds that need to be able to match a benchmark exactly, he said, and be able to rebalance daily and offer daily liquidity.

Mike Sell, head of Asian equities at Alquity Investment Management, took a relaxed stance on MSCI’s position.

“Several times a year markets get very excited about the inclusion of various countries in various indices. Today it is A-shares. This is to completely miss the point of investing. We should be buying companies because they are well run (with good forward looking environmental, social and governance factors), have a good business model and will deliver returns to shareholders,” Sell said.

“Whether a company is in an index or not is irrelevant in terms of the above. An un-benchmarked approach to investing, focusing on fundamentals rather than an artificial index construction surely is the more logical and correct approach,” he said.