Another US stock market
As China opens itself up to more foreign investment, asset managers have been pouring more money into this previously inaccessible part of the market.
JPMAM says it has quadrupled its investments in China A-shares from $1.2bn to $4.6bn within the last three years.
Alliance Bernstein currently has more than $4bn invested in the asset class.
JPMAM’s Austin Forey, manager of the Global Emerging Markets Focused strategy and former self-proclaimed China sceptic, calls the inclusion of A-shares into the MSCI index one of the biggest changes in his opportunity set since he became a fund manager.
“This is a bit like another US stock market emerging into the investable opportunity set for global investors. And I personally don’t think most people in the West have their heads around that in the slightest. It’s still regarded by people running global equity funds as somewhere off benchmark.”
JPMAM’s team currently covers 140 A-shares but Forey expects that number to rise to 200 to 250 stocks within the next one to two years.
He says JPMAM made a deliberate attempt to throw resources at its A-shares capabilities two to three years ago.
“We knew this was coming, and we knew we had to get in front of it,” he says.
“As stock investors we are going to have to get used to the idea that the biggest company in a given industry will be a Chinese company.”
Asia ex China
Numerous commentators have suggested that this move will be a catalyst for launching more Asia ex China funds and create a need for EM ex China funds in the not too distant future.
Plenty have pointed out that China is already over 30% of the MSCI Emerging Market index, although this weighting is almost exclusively made up of stocks outside of mainland China like Alibaba, listed on the New York Stock Exchange, and Tencent, listed in Hong Kong.
The A-shares inclusion added 0.7% to China’s total weight in the index with a 5% inclusion factor for the 234 shares.
But by the time these 230-odd mainland shares are fully included, China A-shares alone could account for between 14% and 17% of the MSCI Emerging Market index, according to analysts.
This would bring China’s total weight in the index closer to 40%, making it by far the dominant country.
Forey says China will likely become a larger part of global equity managers’ universes too.
“If I was running a proper global equity fund, if I didn’t have 20% of my fund in China eventually, I’d be very surprised.”