Main viewpoints
One and three factors contribute to the success of the MSCI emerging Markets Index of A shares for the fourth time.
In the early morning of June 21, MSCI announced that China's A-shares would be included in the MSCI emerging Markets Index from June 2018, which is in line with our judgment of "running water for a source". The reasons for the successful entry of A-shares this time can be summarized as follows: 1) Shanghai-Shenzhen Stock Connect replaced QFII/RQFII as the channel for foreign capital to enter and exit the A-share market, breaking the restrictions on capital redemption; 2) the new suspension rules are effective and the restrictions on pre-approval of financial products are relaxed; 3) international investors realize that the A-share market is playing a more and more important role in the global asset allocation.
Second, finalize the new plan: the number of constituent shares will be expanded to 222, which will be included in two steps, focusing on the "financial and pan-consumer" sector.
1) A total of 222stocks are included in the latest plan, which is obtained by excluding medium market capitalization, non-interconnected tradable stocks and subject to suspension restrictions from the international index of China's A shares. Due to the inclusion of many large market capitalization ah shares, its weight in MSCI EM has increased from 0.5% to 0.73%. 2) in the current situation (Shanghai and Shenzhen Stock Connect has a daily limit of 26 billion), A shares are included in the MSCI Index plan to be implemented in two steps (May and August 2018), in order to buffer the current daily quota limit of Shanghai Stock Connect and Shenzhen Stock Connect. If the quota limit is further relaxed in the future, MSCI may be included in the proportion of 5% at one time. 3) constituent stocks account for the highest proportion in the financial sector (40.11%), followed by pan-consumption (24.26%). The two sectors cover most of the weights. Dynamically, the weight of the financial sector has increased by nearly half, while the weight of most other industries has been diluted.
Third, theoretical calculation, assuming that the initial weight of 5% is implemented at one time, the incremental capital will be about 15.8 billion US dollars.
According to the initial one-time inclusion ratio of 5%, the weights of A shares in the MSCI emerging Markets Index, China Index, Asia (excluding Japan) Index and Global Market Index are 0.73%, 2.47%, 0.87% and 0.1%, respectively. In terms of scale, when the initial one-time inclusion of 5%, MSCI emerging markets, Asian (excluding Japan) markets, global markets, and China index will bring a total increment of about $15.8 billion, or nearly 100 billion yuan, to A-shares.
Fourth, with reference to the process of Taiwan and South Korea's entry into MSCI EM, it is expected that the short-term impact will be more on risk preference, and the positive symbolic significance is far greater than the actual financial impact, which will help to increase the proportion of institutional investors and the internationalization of RMB in the medium and long term.
On the one hand, considering that the increase of the major blue chip component index has partly reflected the optimistic expectation of the market for this event. On the other hand, considering the time span from the constituent stock index approved by MSCI to the actual adjustment index, incremental funds will only enter the A-share market around the second quarter of 2018. In addition, the total amount of theoretical incremental funds is "a drop in the bucket" relative to the current financing balance of A-shares (867 billion) and the one-day turnover of A-shares (4000-600 billion). In the short term, the positive symbolic significance is far greater than the impact of the actual financial side. In the medium and long term, the inclusion of A-shares in the MSCI index system will promote the allocation of international funds to the Chinese market and promote the internationalization of A-shares.
Fifth, foreign-funded institutions allocate A-shares, mainly focusing on companies with "scarcity, excellent performance and super brand value"
The 222nd stocks potentially included in MSCI are all blue-chip stocks in the market, accounting for a large proportion in the "consumption, finance" and other sectors. Taking into account the subsequent entry of foreign institutions (QFII/RQFII) into A-shares, mainly focusing on "scarcity, excellent performance, with super brand value" companies, we correspondingly give the "Super Brand Index" a certain valuation premium, the specific components are shown in figure 9.
Risk hint: MSCI inclusion process is not as expected
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One and three factors help A shares break through for the fourth time and the MSCI emerging Markets Index succeeds.
At around 04:30 Beijing time on June 21, MSCI announced the results of the 2017 market classification review: since June 2018, China A shares have been included in the MSCI emerging Markets Index and MSCI Global Index, which is in line with our judgment in the research and report "Live Water for Source".
Starting in 2013, MSCI announced the launch of the review and consultation of A-shares in the MSCI emerging Markets Index, but in the following three years, A-shares missed the opportunity to be included in the MSCI emerging Markets Index three times in a row. With regard to the fourth breakthrough this year, we mentioned in the MSCI report "for sources of running Water" in early June that the direct reasons for international investors to include A-shares in the MSCI emerging Markets Index can be attributed to three aspects:
1) in the market inquiry plan released on March 23rd, MSCI used Shanghai-Shenzhen Stock Connect instead of QFII/RQFII as the channel for foreign investors to enter and leave the A-share market, breaking the restrictions on capital redemption and greatly increasing the liquidity of capital in and out.
2) the new suspension rules do significantly reduce the number of A-share suspension companies and relax the pre-approval restrictions for global financial products involving A-shares. Fang Xinghai revealed that the outcome of the negotiations between the Chinese exchange and MSCI on the launch of derivatives is that derivatives can be launched overseas, but the launch of derivatives can not affect the A-share market, and the liquidity of important derivatives should remain in China.
3) at a deeper level, the core reason for the success of this MSCI is that international investors realize that A-share market is playing a more and more important role in global asset allocation, and overseas funds are increasingly interested in A-share.
Second, finalize the new plan: the number of constituent shares will be expanded to 222, which will be included in two steps, focusing on the "financial and pan-consumer sectors."
2.1 increase in the number of constituent units of the updated programme: the number of announced programme constituent stocks increased from 169 to 222
The plan plans to add 222 large-cap stocks selected in China's A-share international index, up from 169 in March. The stock selection method of the updated plan is as follows: MSCI has a total of 459 stocks in the existing China A-share international index, excluding 195 medium-cap stocks, 10 large-cap stocks that cannot be bought through interconnection, 22 long-term suspension stocks and 10 stocks suspended during the index review, and the remaining 222 large-cap stocks are included in the emerging market index. The main change of the "reduced version" plan previously proposed by MSCI is to include both A-shares and H-shares that meet the requirements of large-cap stocks listed in both places, while the "reduced version" plan has proposed to remove the A-shares of the joint listed companies of the two places whose H-shares are already constituent stocks of the MSCI China Index.
The weight of the update in the MSCI emerging index rose to 0.73 per cent, up nearly half from 0.5 per cent in March. We explained earlier that the biggest difference in the selection of constituent stocks between this update plan and the March inquiry plan lies in the selection of A-muri H-shares. The update plan includes some A-muri H-shares with a large market capitalization, such as ICBC and Agricultural Bank Of China (both account for 0.02% in the MSCI emerging markets index). As a result, the weight of A-shares in constituent shares has increased by nearly half to 0.73%.
2.2 the update plan includes the initial 5% ratio in two steps: in May and August 2018, respectively.
The initial inclusion ratio is still 5%. Personality MSCI plans to achieve 5% full inclusion in May and August 2018. MSCI said that in view of the current situation (the daily quota has not been cancelled or significantly increased), the inclusion of A shares in the MSCI index plan will be implemented in two steps to cushion the existing daily quota limits of Shanghai Stock Connect and Shenzhen Stock Connect: the first step is scheduled to be implemented during the semi-annual index review in May 2018; the second step is implemented during the quarterly index review in August 2018.
If the daily quota of the Shanghai-Shenzhen Stock Connect is cancelled or significantly increased, the MSCI may include the initial 5 per cent at once. Whether the proportion of A-shares included in the first 5 per cent of the MSCI emerging markets index can be achieved in one step, that is, an one-off adjustment one year after the announcement (around May 2018), still depends on "whether the daily quotas of Shanghai Stock Connect and Shenzhen Stock Connect are cancelled or significantly increased". Fang Xinghai said, "the next step is to consider how to expand the Shanghai and Shenzhen stock market quota, or modify the QFII quota, or directly modify other regulations to allow foreign investors to enter." According to the positive statement of the existing regulators, we think that it is more likely to be adjusted to include the initial 5% at one time.
2.3 the industry concentration of the update scheme is relatively obvious: the "finance and pan-consumption" sector accounts for about 60%.
The constituent stocks of the latest scheme are concentrated in the financial sector (40.11%) and the consumer sector (24.26%, including pharmaceuticals, biology, real estate, etc.) (both schemes are measured by the market capitalization included in the MSCI index), ranking according to the application level industries. The major industries with higher weights are: banking (22.09%), non-bank finance (18.02%), food and beverage (7.1%), architectural decoration (5.79%), public utilities (4.99%), automobile (4.62%), medical biology (4.18%), real estate (4.08%).
Compared with the market inquiry plan announced in March, dynamically:
1) the weight of the financial sector has nearly doubled. The financial sector accounted for 40.11% of the latest plan, up from 21.17% in March. The reason is that there are a number of financial institutions with a large market capitalization, such as the four major banks and a number of brokerages and insurance companies with a market capitalization of more than 100 billion yuan.
2) in addition to the financial sector, the vast majority of industry weights are diluted, and the weight of consumption ranks second. Due to the addition of many financial companies with a high market capitalization, the weight of most industries except finance has been significantly reduced. Overall, the weight of the consumer sector has also been diluted, but it is still in the second place.
Third, the inclusion of MSCI into A shares is more likely to have an impact on risk appetite in the short term, which is conducive to the increase in the proportion of institutional investors and the internationalization of RMB in the medium and long term.
3.1 Taiwan and South Korea are included in the process of MSCI
Inclusion process: the proportion of initial inclusion is relatively small, and it takes a long time from the initial partial inclusion of MSCI to full inclusion.
1) Taiwan: it was first included in the emerging market index in 1996, with a proportion of 50%, but it was not fully included until 2005, which lasted for nine years. In this process, the Taiwan market is accompanied by the gradual opening of the capital market, from allowing foreign investors to invest in Taiwan's stock market through ADR and trust, to finally abolishing the QFII quota system.
2) Korea: it was included in the emerging market index for the first time in 1992, with an initial inclusion ratio of 20%. In the six years since then, with the further opening of South Korea's capital market, the share of the Korean market has been raised to 50 per cent in 1996 and finally to 100 per cent in 1998. In this process, the relaxation of South Korea's capital controls accelerated the increase of its proportion in the MSCI emerging market index, while the increase of inclusion ratio in turn promoted the opening of South Korea's capital market, forming a positive cycle.
Inclusion impact: it can boost risk appetite in the short term and promote the allocation of international funds in the domestic market in the long run.
1) Taiwan: since it was first reported that Taiwan stocks will be included in the MSCI emerging Markets Index on April 2, 1996 and officially included on September 3, the Taiwan stock market has risen by 20.9%. After it was first included in 1996 and fully included in 2005, the Taiwan stock market has seen a wave of rise. The inclusion of the Taiwan market in the MSCI EM index will boost the market in the short term. In the long run, the inclusion of MSCI in the Taiwan market promotes the allocation of international funds to the Taiwan market. Since the Taiwan market was incorporated into MSCI, the proportion of foreign ownership in the total market value has gradually increased since 2000, reaching 36.7% in 2015, 1.4 times that of 2000.
2) South Korea: among the three nodes of initial inclusion in 1992 and proportion adjustment in 1996 and 1998, the maximum increases in the first two times in one month were 7.1% and 4.3%, respectively; in 1998, due to the bull market of the South Korean stock market, the inclusion effect was uncertain. In the long run, the inclusion of the MSCI EM index in the Korean market has prompted overseas investors to increase their allocation to the Korean stock market, and the market value of foreign holdings has been increasing since 1999, from 18.5% in 1999 to 32.9% in 2013.
3.2 theoretical calculation, assuming that the initial weight of 5% is implemented at one time, the incremental capital will be about 15.8 billion US dollars.
Considering that the number of A-shares included increases from 169to 222, with an one-time inclusion ratio of 5%, the weight of Chinese A-shares in the MSCI China Index, the weight in the MSCI emerging Markets Index, and the MSCI Asia (excluding Japan) Market Index rise from 1.7% to 2.47%, 0.73% and 0.6% respectively. The weight in the MSCI global market index is 0.1 per cent.
A rough estimate of the increase in weight will result in an incremental capital of $15.8 billion, or about 107.5 billion yuan. It is roughly estimated that about $10.5 trillion of assets are currently based on the MSCI index, and about $1.5 trillion is used to track MSCI EW. Based on an one-time inclusion of 5 per cent, A shares are expected to account for 0.73 per cent of the MSCI emerging markets index, while the incremental capital generated by the inclusion of MSCI EM is about $10.95 billion. The amount of funds tracking MSCI ACWI is about $2.8 trillion, and that of tracking MSCI Asia (excluding Japan) is about $200 billion. According to Bloomberg data, the current index and public fund size that directly track the MSCI China index are about $14 billion. According to the one-time inclusion of 5%, A shares are expected to account for 0.1%, 0.87% and 2.47%, respectively. The capital increments were $2.8 billion, $1.74 billion and $346 million, respectively. Together, the four markets can attract about $15.8 billion in incremental capital, equivalent to about 107.5 billion yuan.
For the short term, the positive symbolic significance is far greater than the impact of the actual incremental capital, and the impact on the A-share market is more reflected in the positive impact on risk preference, but relatively limited. We estimate that the theoretical value of the incremental capital brought by the latest plan is US $15.8 billion, which is about RMB 107.5 billion.
On the one hand, considering that the increase of the major blue chip component index has partly reflected the optimistic expectation of the market for this event. On the other hand, taking into account the time span from the constituent stock index approved by MSCI to the actual adjustment index, MSCI generally adjusts its component index in mid-May 18 after it is included in A shares in June, and incremental funds will not enter the market until around the second quarter of 2018. In addition, the total amount of theoretical incremental funds is relative to the current financing balance of A shares (867 billion) and the daily turnover of A shares (4000-600 billion). It is really a drop in the bucket. As a result, A-shares are included in the MSCI index, for the short-term, the positive symbolic significance is far greater than the actual incremental capital impact, more reflected in the positive impact on risk appetite, but relatively limited.
In the long run, promote the internationalization of A-shares, improve the investor structure of A-shares, promote the development of derivatives market, and enhance the international status of RMB. At present, in the A-share investor structure, retail investors account for a large proportion while institutional investors account for a small proportion. A-shares are included in the MSCI emerging Markets Index, and foreign institutional investors will participate in the A-share market more widely. On the one hand, they will promote the internationalization of A-shares, on the other hand, they will increase the proportion of A-share institutional investors and improve the investor structure. In addition, the inclusion of A-shares in MSCI will promote the allocation of global funds to Chinese assets, which can promote the internationalization of the renminbi and further enhance the international status of the renminbi.
Fourth, it is suggested to pay attention to the object of "scarcity, excellent performance and super brand value".
Foreign-funded institutions allocate A-shares, mainly focusing on companies with "scarcity, excellent performance and super brand value". The 222nd stocks potentially included in MSCI are all blue-chip stocks in the market, accounting for a large proportion in the "consumption, finance" and other sectors. Taking into account the subsequent entry of foreign-funded institutions (QFII/RQFII) into A-shares, mainly focusing on "scarcity, excellent performance, with super brand value" companies, we give the "Super Brand Index" a certain valuation premium.
The constituent stocks of the Super Brand Index are as follows:
The complete list of 222 constituent stocks is as follows:
Risk hint: MSCI inclusion process is not as expected