On June 1st  2018, the journey to full inclusion of Chinese A shares in the widely followed MSCI suite of equity indices began. 226 stocks became MSCI EM Index constituents at an initial inclusion factor of 2.5%. A-shares are those of mainland-China based companies and were previously only available to domestic investors due to government restrictions. This is changing. The inclusion factor is due to be raised further to 5% in September. If it were to go to 100%, A shares, according to UBS estimates, would represent 14% of MSCI EM and all China related shares would represent over 40% of that index.

As with many things, China’s size means it can’t help but dominate and we’ve seen estimates that suggest that China would drive the overall Asian weight in the MSCI EM to some 80% if they were fully included. Latam and EMEA would be pushed to the fringes, questioning the integrity of the index. Taking high GDP per capita Taiwan and Korea out of the MSCI EM to make the index more ‘emerging’ would only raise China’s weighting still further. China’s inclusion therefore seems likely to set off a chain of debates on the right mix of markets and weightings, with perhaps the obvious ultimate conclusion that, like Japan before it, China needs to be in an Index of its own!

China’s rise in global stock markets has only just started…

.

Source: World Bank WDI and Datastream

Opinions and views from the Equities team at Kames Capital are not an investment recommendation, research or advice and should not be considered as such. Content discussing investment strategies and stocks is derived from and solely relates to the investment management activities of Kames Capital.

About the author

Euan Weir is an investment manager in the Equities team with responsibility for Asia. He joined us in 2015 from HSBC, where he was a Director of Asian Research Sales. Prior to that, Euan was Head of Asian Research Marketing at Merrill Lynch in Hong Kong and was an analyst at Merrill Lynch, Smith New Court and Crosby Securities. Euan studied Land Economy at Aberdeen University and has 26 years’ industry experience*.

*As at 30 June 2018.

Sign up to receive our regular email