Malaysian fund managers positive on China's MSCI inclusion

KUALA LUMPUR - Malaysian fund managers are positive on MSCI's recent move to include Chinese stocks into its global benchmark equity index, though they see limited impacts on markets in near term, as the weightage is minimal and the formal process will only start in a year later.

After MSCI twice deferred its A-share inclusion previously, this time marked a milestone for China's A-share, said Huang Juin Hao, Affin Hwang Asset Management's portfolio manager.

But he sees little impact in short-term to either Malaysian or the Chinese markets as this will only be a 5 percent partial inclusion of China's A-shares and will only be done in two stages of 2.5 percent each, starting in May 2018 and August 2018.

He also noted that full inclusion could be stretched and take a long time as seen in the cases of the South Korea and China's Taiwan, both of which took more than six years.

On the impact to Malaysia, Huang said post the two-step partial inclusion in May 2018 and August 2018, the weight in MSCI Emerging Market (MSCI EM) will drop to 2.38 percent from 2.42 percent, which could result in potential passive outflows of $144 million, and to him, this is a non-event to Malaysia.

However, China's weight in the MSCI EM will increase to 29.31 percent, from 27.99 percent, with potential passive inflows of $5 billion, of which $2.7 billion inflows are expected to A-shares.

"Compared with the A-shares average daily turnover of $65 billion, this is also not significant," Huang added.

For China-H shares, he noted that there is no short-term impact given potential passive inflows of $2.3 billion which is less than 5 percent of average daily turnover.

But he still considered it positive on China stock market. Therefore, the fund house regional portfolio holdings are more than 30 percent exposed to China via H-shares and American Depository Receipts (ADRs).

Lim Suet Ling, UOB Asset Management (Malaysia)'s executive director and chief executive officer, opined that the inclusion of China's domestic equities to MSCI benchmark indices is marginally positive for the A-shares market listed in Shanghai and Shenzhen.

"Since the initial inclusion is small relative to the overall A-shares market capitalization, the near term impact will likely be muted. This is despite that there may be a short term sentiment boost to the broader market," Lim said.

She said that fundamentals are far more influential to the market than index inclusion in the medium to long term.

Since the representation of 222 large-cap-stocks will comprise only a tiny share of the index, the fund house may start investing in some good quality A-shares names if it has very strong conviction in them, Lim added.