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Expect upheaval in Asia's investment landscape when MSCI includes China A-shares in its benchmarks, experts said, with mainland stocks set to explode even further at the cost of local peers.
On Wednesday, MSCI said it expected to include stocks listed in Shanghai and Shenzhen, known as A-shares, in its Emerging Markets Index as soon as market accessibility issues are resolved, a move it estimated could add $400 billion to China stocks over time.
This means inclusion is just a matter of 'when,' rather than 'if,' Nomura said in a report, adding that MSCI would adopt a flexible timetable over the issue instead of sticking to its normal 12-month review cycle.
Inclusion will undoubtedly boost China's already frenzied stock market, which is already up 55 percent year-to-date. Exchange traded funds (ETFs) and investment funds that track MSCI indices will have to adjust and buy 'A' shares to account for their increased weight, adding to their overall funds position, explained Nicholas Teo, market analyst at CMC Markets.
"The amount of new money that may be committed to Chinese A-shares here is not small. Modest estimates for an initial amount to be added come in at over $200 billion, or roughly 10-15 percent of global Emerging Markets funds," said Teo.
"The ultimate inclusion of A-shares into MSCI-EM and China indices supports our bullish stance on the MSCI-China through 2017," echoed Nomura strategists.
However, the adjustment is still a long way off, analyst warn, as most fund managers will only buy A-shares on the date of China's actual inclusion into MSCI.
For now, China's manic stock rally could pause as investors interpret MSCI's decision to delay as a disappointment. Indeed, the Shanghai Composite was down over 1 percent in early trade on Wednesday.
"Institutional investors are underweight China today and they'll only have a real reason to buy when MSCI finally includes A-shares," noted David Riedel, president and founder of Riedel Research.
The delay could see $1.5 billion in passive funds tracking MSCI EM and MSCI China Indices pushed out, warned Nomura.
Certain Asian markets are set to suffer at the time of A-share inclusion since their weighting in the MSCI Emerging Markets Index will naturally be reduced, resulting in some selling.
India could face outflows up to $3.8 billion, according to Kotak Securities. Post inclusion, India's weight in the MSCI EM index may reduce to 7.13 percent from 7.49 percent, while China rises to 28.51 percent from 24.8 percent, the firm said in a report.
Interestingly, South Korea and Taiwan stand to benefit, notes Daniel Wiener, CEO of Adviser Investments.
"When MSCI adds A-shares, they will also look at markets like Korea and Taiwan and say, maybe these markets come out of the EM Index and move into the Developed Markets Index."