Institutional allocations to China's A shares are set to surge this year in tandem with their rising weight in global benchmark indexes, providing an ironic boost for the market's latest retail-powered bull run.
Analysts say MSCI Inc.'s recent decision to lift the weight of A shares to 3.3% of its emerging markets index by November from 0.7% at present should prompt net inflows from overseas investors of between $65 billion and $85 billion in 2019.
Chia Chin Ping, MSCI's Hong Kong-based head of research for Asia-Pacific, said his firm's Feb. 28 decision to boost the portion of China's A-shares markets included in MSCI's index this year to 20% from 5% should draw $80 billion in net inflows — 15% passive and the rest active.
With FTSE Russell likewise adding A shares to its emerging markets indexes for the first time in June, Morgan Stanley at the end of January predicted record foreign A-shares purchases of between $70 billion and $125 billion this year, including $25 billion in passive flows and another $25 billion in active flows from asset owners instructing their emerging markets managers to match the higher A-shares weights in MSCI and FTSE indexes. The remaining $20 billion to $75 billion would come from additional active allocations.
"The interest we're seeing is rising pretty rapidly," with RFPs from some institutional investors and an extraordinary number of conversations with prospective clients around the world, said Donald Amstad, Singapore-based chief operating office and head of investment specialists for Asia-Pacific with Aberdeen Standard Investments.
With mainland stocks poised to account for roughly 15% of MSCI's emerging markets index as the remaining 80% of China's markets is included over the coming five to 10 years, more and more offshore asset owners are looking to discuss how to position their portfolios strategically, said Wong Kok Hoi, founder and group chief investment officer with Singapore-based APS Asset Management Pte. Ltd., a Chinese equity boutique with $2.6 billion in assets under management as of Dec. 31. Many are considering hiring dedicated China managers as opposed to relying on their emerging markets managers to give them exposure to that market, he said.