MSCIng Out

One of the main stock market index providers made an important decision on China in June.

There was a time, long ago, when stock market indices were simple yardsticks, mainly of interest to professional investment managers. These days the number of indices has hugely proliferated – you name it and there is probably an index for it. Indices have also become big business with the growth of passive funds, including exchanged traded funds (ETFs), which do no more than attempt to track a particular index (before charges!).

Last month provided a good example of how important indices and their providers have become when MSCI, a leading US index company, revealed the results of its 2015 ‘Market Classification Review’. The big question the investment community was waiting to be answered was whether shares listed on China’s mainland stock markets (in Shanghai and Shenzhen) would for the first time be included in the MSCI Emerging Markets Index (MSCI EMI). The answer mattered because the index is tracked by close to $1.7tn of funds. Including China’s mainland shares would have meant that funds tracking the EMI would initially have needed to add about $20bn of Chinese shares to their holdings (and correspondingly cut back their holdings in other markets), according to MSCI.

In the event, MSCI decided that the time was not yet right for Chinese mainland shares to join the EMI. It attributed the decision to issues over Chinese-imposed investment quotas, market liquidity and ownership rights. However, MSCI made clear that China’s inclusion was only a matter of time, with May 2017 now the likely date. Eventually China could account for over a third of the EMI on MSCI’s calculations. However, in the short term, Chinese share prices have been extremely volatile since MSCI’s decision.

If you wish to invest in China before the index tracking funds are forced to do so, there are a range of funds which can give you exposure to the world’s largest emerging market. But do talk to us before investing: China is a high risk market and not all funds with China in their name are 100% China – Hong Kong and Taiwan are often included as part of ‘Greater China’.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.