MSCI 2019 Q&A Inclusion Update Released, Apple Earnings, Mainland MF launches
Hope all is well! Virtually every Asian stock market was closed overnight. SH & SZ will be closed the remainder of the week though HK is back to work tomorrow.
- The US trade team’s Beijing trip concluded leading to a May 8th DC trip for China’s trade team leading to late May/early June President Trump and President Xi signing. The Financial Times is reporting that the Trump administration is willing to drop cybersecurity as condition for a deal though I find that hard to believe. I continue to be amazed at how little press coverage trade is receiving in the media as deal being done is completely baked into the market.
- Hong Kong – Closed
- Shanghai & Shenzhen – Closed
Yesterday MSCI provided a Q&A for the inclusion of Argentina ADRs/not locally listed shares, Saudi Arabia and Chinese A shares in their 2019 EM rebalances. MSCI reiterated the previously communicated increase of the Chinese A shares’ inclusion factor from 5% to 20% during the May, August and November rebalances at 5%. The November rebalance will also include mid-caps at a 20% inclusion factor. Chinext listed stocks, a growth board on the Shenzhen stock exchange, will be eligible for inclusion beginning in May. A simulated inclusion based on February data, would see 253 large caps for inclusion and 168 mid caps in November of which 27 would be Chinext listed stocks. Since the end of February, the Shanghai Composite is up 4.67% which means more Chinese A shares could be eligible.
As of the end of March:
- MSCI China has 469 stocks (worth noting 2 stocks BABA and Tencent make up 29% of the index)
- MSCI South Korea 115 stocks
- MSCI Taiwan 87 stocks
- MSCI India 78 stocks
- MSCI EM has 1,136 stocks
While highly controversial, I also believe the 47 stocks in MSCI Hong Kong with $561mm of market cap will be reclassified at some point from developed markets to China. MSCI HK is about 1/3 the size of MSCI China. In a nutshell, there is a lot more China coming to indices!
A mainland media source noted that seven mutual fund families will each raise $148mm to invest in new listings on the Shanghai Science & Technology Innovation board. Small cap stocks could see weakness as investors reallocate to the IPOs. Historically the pace of IPOs has been limited as it can put pressure on the market. The S&T board’s 80 IPO applications could put pressure on small cap stocks.
Apple’s earnings provide an insight into the health of China’s consumer. While sales in China declined from $13B in fiscal year Q2 2018 to $10.2B in fiscal year Q2 2019, Tim Cook spoke to the recent VAT cut on April 1 from 16% to 13% as a catalyst leading for further sales. He said specifically “…the VAT reduction from 16% to 13%, so it’s a very aggressive move. But there are other stimulus programs as well that likely have an effect to the consumer level…I think the improved trade dialogue between the countries affects consumer confidence in a positive way.” The fall in sales is driven by Apple’s steep competition from less expensive Chinese and regional smart phone makers. As China adopts 5G, it could lead to an upgrade cycle for Apple and others.
US listed Chinese companies enter earnings season the week after next. I will be in China that week though will do my best to get a note out.
Next week we have a meetings with CICC Chief Economist Dr. Liang, MSCI’s Head of Asia Research, and a meeting with officials from the Shanghai & Shenzhen Stock Exchanges. If there are questions you would like asked please let me know!
- CNY 6.73 versus 6.73 yesterday
- Yield on 1 Day Chinese Gov’t Bond 1.92% Tuesday versus 1.92% Monday
- Yield on 10 Year Chinese Gov’t Bond 3.43% Tuesday versus 3.44% Monday
- Yield on 10 Year China Development Bank Bond 3.81% Tuesday versus 3.84% Monday
- Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.08% on Tuesday