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China A shares inclusion to MSCI EM index may see fund outflow from India

LiveMint logoLiveMint 22-06-2017 Nasrin Sultana

Mumbai: The inclusion of China A shares in US index provider MSCI's benchmark Emerging Markets (EM) index on a gradual basis beginning next year is expected to weaken market sentiment in India, on concerns that this may prompt investors to move funds to that country.

China’s mainland-traded stocks are known as ‘A’ shares in China.

The addition of these yuan-denominated ‘A’ shares, a move that came after four years of consultation, will bring the number of China A shares in the index from 169 to 222. MSCI made the announcement on 21 June.

Goldman Sachs said among emerging markets, India, South Korea and Taiwan may see the largest dilution in index weights, but selling pressures are likely to be modest. It added that post-inclusion, China A will account for 0.7% in MSCI EM after August 2018. It estimates about $12 billion of net buying from emerging markets funds for the 222 shares which is equivalent to one day turnover.

According to CLSA,  the inclusion may result in the reduction of India’s weightage in the index by 6.51 basis points to 8.85% from 8.92%. It added that China may see inflows of $15.9 billion due to the inclusion.

Nomura said it expects outflow from India to be around $2.7 billion after the rejig. 

HSBC said after the actual rebalancing process in May and August 2018, China A shares may see foreign inflows of $500 billion in 5-10 years. 

However, there are some analysts who still think the move won’t impact India much. “In the short term, the exposure to China A share would be capped at 5%. Hence, while the weight of India will come down, the outflow impact would not be significant. The more interesting fact is that the weight of Taiwan with GDP of less than half a trillion dollars is 50% higher (at circa 12%) as against weight of India with GDP of over two trillion (at circa 8%),” said Singapore-based Sanjay Guglani, chief investment officer at Silverdale Funds told Mint.

Domestic fund flow into India has been supportive this year. In 2017 so far, domestic institutional investors (DII) bought Rs 19,114.88 crore while foreign institutional investors (FII) bought $8.16 billion. Indian markets’ position in the EM basket has been firm, with MSCI India gaining 15% while MSCI EM was up 16.72% in 2017.

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