Against growing expectations, global index provider MSCI decided against including China A-shares into its Emerging market index (MSCI EM). The street seems to have taken a breather as MSCI said that it will consider such an inclusion after certain issues related to market accessibility have been resolved. In the recent past, concerns that addition of China A-shares into the MSCI EM index may lead to selling by foreign portfolio investors (FPIs) in order to maintain a proportional exposure had impacted the sentiment on the street.
Currently, MSCI EM index, in which India enjoys close to 7% weightage, already boasts close to 26% allocation towards China H-shares, Hong Kong listed shares of Chinese companies. It was feared that if the global index provider decides to include China A-shares into the EM index, it could lead to a reduction in the weightage of other EM markets, including Taiwan, Brazil and India ( more than 100 bps or India).
As per an estimate by Kotak Institutional Equities, such an event could have led to a selling of close to $3.8 billion worth of Indian equities as “India’s low correlation with Shanghai may require active managers to re-assess their overweight position in India”.
However, the event may be averted only near-term given that MSCI may go ahead with the inclusion once its concerns including capital mobility restrictions, beneficial ownership and quota allocation process are resolved. “This may happen outside the regular schedule of its annual Market Classification Review,” MSCI said in a press release on its website.
Ahead of the announcement, Credit Suisse had estimated that the earliest inclusion of China A-shares could happen post November 2016 semi annual index review.