A shares should be included in MSCI index, says emerging markets guru Mark Mobius
Fund manager says mainland China market has opened up more
Templeton Emerging Markets Group executive chairman Mark Mobius says A shares are ready to be included in MSCI indices in June, which may lead to US$400 billion of funds flowing into the mainland Chinese market because many fund managers follow them.
Mobius – dubbed the “father of emerging markets” – said it was also time to buy China and emerging market equities. About US$1.7 trillion of funds track MSCI’s emerging market indices.
In June last year, Mobius agreed with MSCI’s decision not to include mainland stocks in its benchmark emerging markets equity index as many barriers remained in place for foreign investors wishing to invest in A shares.
But he said conditions were now ready for A shares to be included because the mainland had opened up more and would continue to do so with moves such as the expected launch of the stock connect scheme between Hong Kong and Shenzhen in the second half of this year.
Beijing launched the first stock connect tie-up between Shanghai and Hong Kong in November 2014. It allows international investors to trade A shares in Shanghai up to a quota, an arrangement which Mobius said was “much better than the Qualified Foreign Institutional Investor (QFII) scheme”. which was launched in 2002 and gave selected fund houses, banks or insurance companies quotas to invest in A shares.
“The QFII has lock-up period,” he said. “The stock connect does not have lock-up period and is far more flexible and attractive for international investors to trade A shares. QFII was only an interim measures for China to open up its market and I believe the stock connect schemes will eventually replace the QFII for the long term.
“The Shenzhen stock market looks very attractive as it has many high technology and high-growth companies.”
Mobius manages US$26 billion for clients in emerging markets including Hong Kong and mainland China. The fund was the first emerging markets fund sold to the US public in 1987, at US$100 million. It hit a peak of US$40 billion in 2007 before falling in recent years as investors worried about Chinese and emerging markets slowdowns.
He said the second quarter would be the time to invest in A shares and other emerging markets.
“When everybody is saying something bad about China, such as the stock market is not good, the economy has slowed down, when there is so much bad news, it is the right time to buy in China,” he said. “The A-share market has come down 40 per cent from the peak while MSCI is considering to include A shares in its emerging market indices. The China market is at a turning point and will recover in the second quarter.”
He said Brazil, where stocks had bounced back, also had room to grow when it hosted the Olympic Games this summer.
“The US market has been strong in the past three years and the emerging markets have underperformed,” he said. “The valuation of emerging markets is very cheap.”
Some hedge funds placed bets on yuan depreciation at the beginning of this year but Mobius said he expected the currency would be stable.
“The yuan will join the International Monetary Fund’s special drawing rights as a reserve currency in October,” he said. “China would like to keep the currency stable for its credibility as a reserve currency.”
In terms of sectors, he said investors needed to be careful about pharmaceutical stocks.
“Although the ageing population supports these stocks, their valuations are expensive,” he said. “This is something investors need to be very careful of.”