Institutional investors might soon have occasion to ponder what the opposite of catching a falling knife is.
A metaphor appropriate for markets moving north rather than south could come in handy beginning June 9, when MSCI Inc. announces whether it will include a fraction of China's surging A-shares market in its indexes.
A decision by MSCI to add A shares to its main indexes now would force benchmark-aware asset owners to buy stocks that are looking very pricey.
On May 26, FTSE Russell, MSCI's biggest rival, took a half step in that direction, announcing “transitional” emerging markets indexes with 5% exposure to A shares that clients can opt to use instead of FTSE's standard emerging markets indexes.
In contrast to launching parallel indexes, MSCI officials are considering changes to the firm's main emerging markets and regional indexes. BNP Paribas Corporate & Institutional Banking estimates those changes could result in $22 billion of A-shares purchases, assuming active managers target the weightings MSCI has proposed, said Winner Lee, the firm's Hong Kong-based Asia equity and derivatives strategist.
A year ago, MSCI's first look at the question of including 5% of the $7 trillion A-shares market in MSCI's investible universe concluded with a decision not to do so, amid global manager concerns that the quotas needed to invest directly in Shanghai and Shenzhen remained too difficult to obtain.
Since then, the A-shares market has emerged from a five-year slumber to post the strongest gains of any major exchange over the past year, driven in part by widespread margin borrowing by retail investors, who account for more than 90% of that market's daily turnover.
The Shanghai Stock Exchange Composite index has risen 126% to 4,611.74 in the 12 months through May 29.
The bull market has picked up steam even as China has continued to retreat from the double-digit growth that powered the global economy for much of the previous decade.