Nikkei nears two-year high as US hi-tech rebound boosts mood

Cornelia Mascio
Giugno 20, 2017

It can therefore be a first step in accessing China's onshore equity market in a reassuring and controlled manner, before moving on to bigger and better things. "While we believe that inclusion in watch list for Saudi will lead to enhanced market liquidity and generate more interest in the Saudi market, we caution investors to be wary of irrational exuberance as inclusion is unlikely to change market fundamentals which now remain tepid", said a note by Alrajhi Capital.

The closest scrutiny by far has come from the beneficial owners and asset managers of index tracking funds, as some of the existing challenges with new emerging markets such as China revolve around how "trackers" can ensure that they deliver performance as close as possible to the index return. The restrictions and rules proposed by MSCI complement this by limiting the investment universe to the highest-quality and most liquid shares, which many see as an acceptable compromise. "Index provider set to make call on including mainland A-shares in its EM benchmark". Adding A shares to the index would trigger inflows into China's domestic stock markets due to fund mandates. "This channel allows approved foreign funds access to A-shares but under conditions that limit their ability to repatriate their money - an issue flagged by MSCI previous year when it rejected the inclusion of A shares", according to the FT.

However, since MSCI has narrowed the universe of stock picks to 169 from 448 previously and chose to only include initially 5 per cent of the free-float market cap, the expected capital inflow to China will be small.

If a deal is finally hammered out, A-shares would account for just 0.5 percent of the MSCI Emerging Markets Index.

Mohammed El-Kuwaiz, vice chairman of the Capital Market Authority, said he expected the Saudi market to be included in the index by the end of 2018, according to the Asharq al-Awsat newspaper, Reuters reported.

Therefore, I do not expect a large market impact from the decision to be made by the MSCI Index committee.

The blue-chip CSI300 index fell 0.2 percent, to 3,546.49 points, while the Shanghai Composite Index shed 0.2 percent to 3,140.01 points.

"Trade volume is light and whether the market continues to rise depends on whether large cap tech shares continue to rebound", he also said.

If MSCI says "No", A shares may react with a 1 per cent decline, which is still "minor", the analysts said.

A positive decision won't have an overnight impact, but billions of dollars will flow over time from big global investors from existing markets (including Australia's) into Chinese shares.

"These programs are essential in paving the way for Chinese equities and bonds to be included in major global indices", she added.

However, some investors appear retreating just ahead of the MSCI announcement, exchange-traded fund (ETF) data suggests.

The only obstacle to overcome is the pre-approval requirement.

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