China's loss helps Sensex to post relief rally
Entry of China A' shares in MSCI would have led to an outflow of $2b from Indian equities.
Mumbai: In a major relief to emerging market equities including India, Morgan Stanley Capital Index (MSCI) has decided against including China A shares in its global indices.
According to industry estimates, about $75-80 billion worth of passive funds are bench-marked to MSCI index apart from several other active funds. The inclusion of China A shares in MSCI Emerging Market index was expected to reduce India’s weightage in the index from 8.5 per cent to 6.8 per cent, which according to market participants would lead to an outflow of around $2 billion from domestic equities. Similarly, the weightage of South Africa would reduce from 7.3 per cent to 5.8 per cent while Brazil will see its weightage dropping to 5.3 per cent from 6.7 per cent. The non-inclusion of China A shares is considered positive for the Indian markets as it is still one of the best in the emerging market universe with better macroeconomic fundamentals and improving corporate earnings growth.
On Wednesday, the Indian equity markets snapped their four-day losing streak with the Sensex climbing 330.63 points or 1.25 per cent to end the day at 26,726.34. The broader 50-share Nifty ended the day at 8,206.60 soaring 97.75 points or 1.21 per cent.
“International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index. In keeping with its standard practice, MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants,” said Remy Briand, managing director and global head of research, MSCI. According to MSCI, the 20 per cent monthly repatriation limit prescribed by China remains a significant hurdle for investors that may be faced with redemptions such as mutual funds.
“Finally, the local exchanges pre-approval restrictions on launching financial products remain unaddressed. Hence, MSCI will retain the China A shares inclusion proposal as part of the 2017 Market Classification Review,” MSCI said.