Friday, June 23, 2017

China added to MSCI indexes

Krane shares:

On Tuesday afternoon at 4:30 PM EST global index provider, MSCI, announced they will include Mainland Chinese equities (A-shares) tracked by the MSCI China A International Index to their Global Standard Indexes starting in May 2018. These indexes include the MSCI Emerging Markets, AC Asia Ex Japan, and ACWI Indexes#. We believe this historic news will have far reaching implications for global investors in the years to come.

What will be the long-term implications of the announcement?

Upon full inclusion, which we estimate could take up to five years, the securities tracked by the MSCI China A International Index should grow to represent an additional 17% of the MSCI Emerging Markets Index. This should bring China’s weight overall (including Mainland, Hong Kong, and US listed Chinese stocks) to over 40%3. This could translate to several hundred billion dollars in total inflows from both active and passive managers.

It is hard to believe that these various global stock indexes did not include the second largest economy's stocks into their various indexes. Now that these indexes will have a Chinese weighting anyone who bases a portfolio on these indexes will be forced to buy Chinese stocks.

This will lead to billions and billions of dollars flowing into Chinese stocks over the next few years. What I found of particular interest is the fact that this was very under reported. Sentiment towards China is terrible today and everyone is predicting a crash of the Chinese economy due to over indebtedness and imbalances in the economy.

The Chinese stock market is one of the cheapest according to the CAPE ratio so that makes this even more interesting.

I have taken a position in the Krane Shares MSCI China Shares ETF (KBA) as a way to play this story.


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