China: All eyes on MSCI decision - BBH

On June 20, MSCI announces its annual updates and investors are focusing on four countries:  China, Saudi Arabia, Argentina, and South Korea, explains the research team at BBH.  

Key Quotes

“In the fourth attempt to include China's A-shares, MSCI has proposed a scaled-down version of last year's proposal.  It could include 169 Chinese companies' shares, down from 448 previously.  The issues are accessible through the stock-connect link between Hong Kong and Shanghai and Shenzhen.  Large cap companies only are included.  The odds seem to have increased, but it remains a close call.  Two issues may not have been adequately addressed. They involve the suspension of shares and market data.  Chinese shares (that trade in HK, and in ADRs) account for about 25% of the MSCI emerging market equity index.  The proposed A-share inclusion would account for about 0.5% in the index, a modest step.  Over time, the China's shares may eventually account for 40% of the MSCI emerging market equity index.”

“Argentina has seen foreign inflows into its equity market amid speculation MSCI will include Argentina shares again in its Emerging Market equity index.  Some of the same firms that appear to be lobbying for it may have also been buying the shares.”

“Saudi Arabia has implemented several reforms to that would make including it in the MSCI Emerging Market equity index more likely, including introducing short sales and T+2 settlement.  Foreign investors have less than 5% stake in the Saudi equity market, and there is not a strong lobbying effort to include them.”

“The issue with South Korea is whether MSCI upgrades it to a developed market rather than an emerging market.  The increased weight of China in the emerging market index means a smaller weight for South Korea.  Being including the developed market index would make it accessible to a different category of investors, with a larger pool of capital.”