2018 hasn’t been a vintage year for domestic Chinese equities (A-shares). The CSI 300 is down 20% year-to-date and the largest US-listed Chinese equity ETFs have seen broad outflows.
Nevertheless, I believe we’re close to a bottom in the rout, and a long-term growth driver is almost upon us. It’s time to go long the CSI 300 (ASHR).
The new index inclusion play
A-shares received a lot of attention earlier this year as MSCI (MSCI) made the historic and symbolic inclusion into its MSCI China Index – and therefore MSCI Emerging Markets, as well as other broad indices. It happened during the height of the hype surrounding Trump’s tariffs on China, as well as a multi-month decline in equity prices after an impressive 2017.
Now it’s time for another index inclusion, just after another round of tariffs on Chinese goods. FTSE Russell is getting set for its A-share inclusion decision. Arguably, this is more important than MSCI’s decision last year, because this would kick off competition between the two index providers to offer the best exposure to China.
FTSE Russell has been here before. In 2016, it announced a transitional (optional) version of its flagship Emerging Markets index that includes A-shares. Its biggest asset manager client – Vanguard – duly adopted the index for its EM fund (VWO).
That was the first step towards broad index inclusion, but the subsequent step was much more symbolic: MSCI’s inclusion. Opt out as opposed to opt in. This was only the initial move, split into two stages: half of the initial inclusion (Emerging Markets index giving a 0.4% allocation to A-shares) occurred in May, while the second half (now an allocation of 0.8%) happened this month. But there’s much more to come from MSCI: this initial move was a 5% inclusion factor, i.e 0.8% allocation is just 5% of the expected future allocation it intends to allocate to A-shares, equating to a future weighting of 40% of the Emerging Markets index.