MSCI adding China's US-listed shares

Updated: 2015-11-30 10:38

By Paul Welitzkin in New York(China Daily USA)

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US-listed Chinese companies will become more prominent in the investing world as MSCI Inc includes all 14 in its emerging market index.

The move by global index complier MSCI last week means shares of Alibaba, Baidu, Ctrip,, Netease, New Oriental Education, Qihoo, Qunar Cayman Islands, Soufun Holdings, Tal Education, Vipshop Holdings, Youku Tudou, YY, and will occupy a place in its global investing benchmarks.

"The global trading architecture is opening up so more Chinese stocks are accessible for overseas investors. This should be a long-term positive for Chinese stocks - especially those that are overlooked and undervalued and will benefit from better access from this open architecture for trading," said Peter Halesworth, managing partner of Boston-based Heng Ren Investments LP, an investment firm focused on US-listed Chinese stocks.

Investors celebrated MSCI's recognition early, according to Halesworth, who said October saw a huge run up in the stocks. "The prices of Alibaba, Baidu, and Ctrip were all up 30 percent to 50 percent in just one month prior to the news," he said.

Asset managers, pension funds, insurers and individual investors hold passive investments like an exchange-traded fund (ETF) or mutual fund that track an MSCI index. KraneShares, a mutual fund firm that invests in Chinese companies, said in a newsletter that MSCI has about $9.5 trillion benchmarked to its indices as of last June with $1.6 trillion tracking the Emerging Markets Index alone.

MSCI adding China's US-listed shares

"By adding the US-listed Chinese companies to the China portion of their indices, MSCI is also changing the balance of its current country allocations. This means stocks in other countries such as India, Russia and Brazil must be sold in order to purchase the newly included shares," the KraneShares newsletter said.

"We anticipate the China weighting in the MSCI Emerging Market Index will increase 3.5 percent as a result."

Halesworth said this move is in step with the changing narrative of the Chinese economy.

"China is rebalancing its economy to be more consumption-driven, more technological, and more service-oriented. The best investment opportunities in China are in technology, consumption, health care, and services," he said. "Investors should get ahead of the next round of MSCI inclusion and invest in Chinese companies listed in the US that are leaders in these sectors."

KraneShares noted that the sectors within the MSCI China Index will see their weighting affected as the existing Hong Kong-listed Chinese companies (H-shares) need to be sold to make room for the US-listed companies. Technology, for example, will go from accounting for 14 percent of the index to 27 percent, according to an analysis from KraneShares.