Chinese stocks still underrepresented in top indices

1 February 2019

Although mid-2018 China A-Shares were added to the MSCI Emerging Markets and All Country World Indices, they remain underrepresented in broader international equities indices, according to Zenith.

The research house believed that such an inclusion would materially help increase investment opportunities for active fund managers as the Chinese stock market offered “significant depth in a number of different sectors”.

Also, the inclusion of Chinese stocks in mainstream international equities indexes would improve their liquidity.

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At the same time, investors should be aware that these shares came with higher risk and volatility that resulted from its high retail investor participation who generally had a shorter time horizon compared to institutional investors.

However, according to Zenith’s investment analyst, Thushani De Silva, the Chinese shares were still worth monitoring as they offered new opportunities for active managers to diversify their portfolios and enhance performance outcomes.

“As more China A-Shares are introduced, the composition of the emerging market index will change with increased exposure to sectors such as financials, industrials and real estate,” he said.

Zenith’s own estimates indicated that, on average, its rated fund managers who invested in emerging markets had increased their average exposure to China from 18 per cent to 22 per cent over the past 12 months, with A-Shares exposure doubling from two to four per cent.

“We consider the integration of A-Shares into mainstream indices to be beneficial for our rated active fund managers,” De Silva said.

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