Foreign-listed China equities to enrichen MSCI index

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Index provider MSCI will start including foreign-listed companies in both the MSCI Global indices and MSCI Country indices from November 2015, resulting in the likely presence of well-known Chinese internet heavy-hitters such as Alibaba and Baidu in the MSCI China equities index later this year and the addition of Jardine Matheson, and Hong Kong Land (both Singapore-listed), and US-listed Melco Crown to the MSCI Hong Kong index.

In general, companies representing a material proportion of the index market capitalisation – more than 5% of the MSCI Country investible market index and 0.05% of the MSCI AC World index – will become eligible for inclusion, broadening the coverage of the equity benchmarks and potentially their appeal to investors.

CHANGES IN THE MSCI CHINA EQUITIES INDEX

With 17 of the potential candidates for the inclusion being of Chinese companies, the MSCI China index could undergo a significant shift. The additions would equate to a nearly 15%* weighting in the new China benchmark, with the information technology sector receiving the largest boost and rising to a 22% weighting in the MSCI China. Conversely, the financials sector would slip to 35%*.

It is worth pointing out that the P/E multiple of the MSCI China would become richer since many Chinese internet companies trade at higher multiples. The average earnings growth for the benchmark would improve as IT names in general offer higher growth prospects.

MSCI China

INDUSTRIALS TO EXPAND IN THE MSCI HONG KONG INDEX

The three companies proposed by MSCI for inclusion in the Hong Kong index equate to a roughly 6.6%* weighting post-addition. The Industrials sector would grow by 3%, but financials would be slimmed down to 61%*.

20 JOINERS IN THE MSCI ASIA EX-JAPAN INDEX

The proposed additions to this index would have a weighting of around 5.4%*. Most countries in Asia would see a dilution as the China and Hong Kong weightings increase, with China’s weighting estimated to rise to 30%* of the benchmark. At a sector level, technology would grow to 24%* post-inclusion and consumer discretionary to 9%* of the benchmark.

MSCI Asia Ex-Japan

* Source: UBS Research estimates, 16 January 2015

Hue Lu

Senior Investment Specialist, Asia Pacific and Greater China equities

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