Hong Kong may be the winner after MSCI decision on A shares

PUBLISHED : Wednesday, 15 June, 2016, 11:32pm
UPDATED : Wednesday, 15 June, 2016, 11:32pm

Hong Kong may be a winner after index compiler MSCI announced yesterday it would not include yuan-denominated A-shares in its emerging markets index.

Louis Tse Ming-kwong, a director of VC Brokerage, said the MSCI decision would benefit the city as institutional investors can continue to buy H-shares listed in Hong Kong as a proxy to investing in the mainland market.

“If the MSCI would decide to include the A-shares into its index, many fund managers who track the index may need to sell the H-shares or other Hong Kong listed stocks to finance their buying of the A-shares according to the index weighting,” Tse said.

“The MSCI decision is thus good news for Hong Kong stocks,” he said.

MSCI yesterday justified its decision not to include A-shares by saying the mainland market is still not open enough for international investors, because of the many restrictions.

But Guillaume Derville, head of Asia equity and derivative strategy at BNP Paribas, believes MSCI would eventually accept having A-shares join its index in the future. When that happens, he said, Hong Kong will be affected.

“The initial impact to Hong Kong’s market will not likely be significant,” he said. “Over the long run, the offshore channel will become less significant as China’s capital market is opening.”

Joseph Tong, chairman of Morton Securities, was also positive, saying even after A-shares are included and international investors can directly buy them, Hong Kong will still benefit.

Hong Kong’s equity market will benefit given the positive sentiment that the A-share inclusion would bring to Chinese stocks in general
Ken Wong, Eastspring Investments

“Fund houses would hire more analysts and traders in Hong Kong, as they are more familiar with the A-share companies. They would like to use Hong Kong as a stepping stone to invest in [mainland] China. Hong Kong is so close to the mainland that would be easy for them to do company visits and to collect information for their investment research,” Tong said.

“Now, with the MSCI [excluding] A-shares in its index, Hong Kong would not be able to capture these development opportunities. We have to wait for the MSCI review next year then,” he said.

Ken Wong, Asia equity portfolio specialist at Eastspring Investments, also believes Hong Kong will benefit from A-share inclusion in the future.

“Hong Kong’s equity market will benefit given the positive sentiment that the A-share inclusion would bring to Chinese stocks in general,” Wong said.

“In addition, we also believe that H-shares can benefit further with A-share inclusion as H-shares are currently trading at a 20 per cent discount to A-shares,” he said.

A wide price gap between the A-shares and H-shares would lead investors to trade between the two types of shares for profit, adding to trading volume.

Bank of China Hong Kong (BOCHK) said in a report that the MSCI decision may have a short term impact on Hong Kong and the mainland stock market performance but it would not be substantial.

“The Hong Kong and mainland stock markets have been trading lower earlier this week ahead of the MSCI announcement. This showed investors were not all that positive to the MSCI inclusion of the A-shares. The negative impact to the Hong Kong stock market would not be high,” the BOCHK report said.

Some local brokers said Beijing, by fighting for MSCI inclusion in its next review, would like to carry out more market reforms which it believes would benefit the local market.