A-share inclusion in the MSCI could drive foreign capital inflow

Added 13th May 2015

A-share inclusion in the MSCI could drive foreign capital inflow

“The economy is slowing, but what is interesting is if you look at China’s contribution to global growth, and then you look at China’s weighting in the MSCI World Index, then there is a huge under-representation of China,” Yeung said in an interview with Fund Selector Asia.

China has less than 3% representation in the MSCI World Index, she said.

“This certainly does not reflect China’s presence on the global stage.

“Whether ADR or A-shares gets included in the MSCI China index, we think there will be a huge amount of investment opportunity.”

The MSCI had in June 2013 initiated a review of China A‐shares for a possible inclusion in the MSCI Emerging Markets Index. But in 2014, it chose not to add the mainland Chinese equities to its global benchmark indices. 

According to reports, the MSCI is likely to announce the assessment of China A-shares in June.

Expectations are high as the country gradually opens its capital markets for global investors. Initiatives such as the launch of Shanghai Hong Kong Stock Connect, the expansion of the Renminbi Qualified Foreign Institutional Investors scheme beyond Hong Kong, and the recent lifting of the $1bn ceiling on the QFII (Qualified Foreign Institutional Investor) programme have helped increase the flow of foreign capital into China.

Turning overweight on China

Yeung said the fund house recently raised the allocation to China in the Fidelity Emerging Asia Fund. The product was underweight China at the beginning of the year.

The fund has a domestic consumption theme and a favourite sector is IT, particularly since e-commerce is only beginning in China. 

In terms of the financial sector, the fund has exposure to brokerages and insurance companies. 

Tencent Holdings, China Mobile and China Life Insurance Company are among the top 10 positions of the fund.

However, the property sector in China is underweighted. 

Yeung was sceptical about China’s troubled state-owned enterprises. 

“A lot of SOEs have very attractive assets but some of them are inefficiently managed. The SOE reforms don’t mean that we just go and buy a basket of SOE stocks to play this theme. It is going to be very stock specific.”

Indian consumption 

The fund is overweight India and the manager is increasing allocation to companies that can potentially benefit from domestic consumer spending and the increase in state spending on infrastructure projects.

In the financial sector, the fund has a preference for private banks as there are concerns over the rise in non-performing loans in public sector banks.

The HDFC Bank and Housing Development Finance Corp are some holdings in the portfolio.

A critical issue is the ease of doing business in India, which the government aims to address, she said.

“We agree that [Prime Minister Narendra] Modi has this great campaign about ‘Make in India.’ But in order to attract investment from foreigners, you need to see better efficiency in terms of doing business there. That is a key checkpoint that he is looking at

“Modi has not made any big bang reforms. The government has constantly been reiterating that things take time. From an investor’s perspective, it is a checklist that you just have to keep monitoring.”

ASEAN-A mixed bag

In Southeast Asia, the fund is underweight Malaysia. Yeung believes the country’s high foreign debt level could result in strong market volatility when the US raises interest rates.

The fund has just a 4.9% allocation toward Malaysia while the country has a 10.8% weighting in the fund’s benchmark index.

The manager is also underweight Thailand.

“We are monitoring Thailand ahead of the election and are following a stock specific approach.”

In regards to Indonesia, the allocation is marginally underweight. But Bank Rakyat Indonesia features in the top 10 holdings list.

The fund house has been overweight the Philippines for quite some time, she said. The country has a 6.4% weighting in the portfolio compared to its 4.2% weighting in the index.

“The Philippines is the best performing economy from a macro story,” Yeung said. “Consumption is picking up. Moody’s has upgraded the country’s rating. But like India, the market is becoming very expensive.”

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