Investment company managers comment on addition of China A shares to MSCI Emerging Markets Index

On Tuesday 20 June, MSCI announced that it will be including China A shares in the MSCI Emerging Markets Index and MSCI ACWI Index (All Country World Index) for the first time. The addition to the indices comes after three previous years of rejections.

Today, the Association of Investment Companies (AIC) has collated comments from investment company managers with significant exposure to China for their thoughts on this milestone achievement and the outlook for China:

Dale Nicholls, Portfolio Manager, Fidelity China Special Situations said: “The announcement by MSCI has been widely expected and is positive news for China’s onshore markets. This is a further step forward in the opening up of China’s capital markets and ensures foreign investors can no longer ignore China’s onshore market. The breadth and depth of China’s onshore market is huge, but still relatively under-researched, which means there are many interesting stock picking opportunities. I would expect that over time the onshore A-share market grows in importance not just in Asia, but globally too.”

Howard Wang, Portfolio Manager, JPMorgan Chinese Investment Trust said: “We welcome the latest decision made by MSCI. This is an acknowledgment of the tremendous effort China made in the past few years and it is a key milestone in the overall capital market liberalisation process. We expect this news to provide a much-needed catalyst for the lagging China A-share market year-to-date.

“Whilst MSCI inclusion is big news for the fund management industry, we have long seen the importance of this asset class and prepared years in advance. We received our first QFII license to manage China A shares back in 2005 and began managing dedicated China A share mandates in 2006. We already hold a 16.9% position in the China A-share market in the JPMorgan Chinese Investment Trust.

“Over the medium to longer term, we expect the weighting of China A-shares to expand over time in global indices. The higher foreign participation should help rebalance the investment styles and horizon of the market which is mostly dominated by retail investors at the moment. In addition, we believe foreign investors would be more interested in quality names in sectors that enjoy secular growth opportunities.”

Carlos Hardenberg, Lead Portfolio Manager, Templeton Emerging Markets Investment Trust said: “We do not view the decision by the MSCI to include China A Shares in its global benchmark equity index as a significant change, as it is a move that has widely been anticipated by the market.

“At this stage, the changes are relatively small with the stocks representing just 0.73% of the benchmark. The bigger structural change that we foresee in the coming years is the inclusion of offshore listed companies; this will have a larger impact on China’s overall weighting in the index. In this instance, investors will need to be mindful as Chinese stocks could dominate the index, reducing the degree of diversification.”

Outlook for China

Howard Wang, Portfolio Manager, JPMorgan Chinese Investment Trust said: “In terms of market outlook and positioning, while macro-economic optimism has likely peaked in the near term, the still substantial underlying economic strength in China affords policy-makers room to rein back stimulus policies and to normalise financial conditions. Corporate earnings have generally been encouraging (with the exception of banks) and consequently, we continue to expect rising markets albeit with market leadership shifting away from most cyclicals. We have continued to reduce cyclical exposure in favour of consumer; otherwise our sector strategy remains unchanged.”

Carlos Hardenberg, Lead Portfolio Manager, Templeton Emerging Markets Investment Trust said: “As active managers we do not follow the benchmark and continue to find value in the domestic consumer market and technology stocks in China. Overall, we maintain our cautious stance on China and remain selective in our stock selection.”

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Notes

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs.  The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 349 members and the industry has total assets of approximately £168 billion.
2. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.