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The Chinese companies joining your emerging markets fund

Following MSCI's decision to add foreign-listed shares in its main indices, you could have more exposure to Chinese shares than you think
November 25, 2015

If you hold a fund tracking the MSCI Emerging Markets index, your exposure to Chinese shares could be about to grow, following the index provider's decision to add 14 US-listed Chinese stocks to its MSCI China and MSCI Emerging Market indices at the end of this month.

Companies listed in foreign countries were previously excluded from MSCI's indices, but the provider has decided to include 21 foreign-listed shares, American Depositary Receipts (ADRs), including several major Chinese technology companies listed in the US. This means that China's weight in the MSCI Emerging Markets index will increase from 23 per cent to 26 per cent.

The three largest companies added to the MSCI Emerging markets index will be Alibaba (US:BABA), Baidu (Nasdaq:BIDU) and United Arab Emirates telecommunications company Etisalat. The full range of stocks are to be added in two phases, on 30 November 2015 and 31 May 2016. The main additions will be concentrated in China's major technology stocks and will have an impact on the sector weighting of the index. Currently, it is most heavily exposed to financials, but that could be set to shrink in favour of consumer and tech stocks.

The sector weightings of the MSCI China and MSCI China small-cap indices have been affected - the MSCI China index weighting to IT has increased by 7.3 per cent and banks have dropped by 2.5 per cent. Additions to the small-cap index include advertising company Airmedia (US:AMCN), eHi Car Services (US:EHIC) and Cheetah Mobile (US:CMCM). Tutoring company TAL Education (XRS), video site Youku Tudou (US:YOKU) and e-commerce stock 58.com (US:WUBA) are all joining the mainstream index. According to Deutsche Bank, the change will also affect the valuation profile of the index, with highly valued shares making up a larger chunk.

China's presence in MSCI's indices has been controversial. The provider was considering the addition of domestic traded Chinese A shares to its indices, but put the decision on hold earlier this year, months before a dramatic stock market crash wiped a third of the value off those A shares within one month.

The crash affected Hong Kong-listed H shares as well as the A share market. Even though H shares and ADRs are not listed in China, they are still vulnerable to market fluctuations. But the companies now included in the MSCI are a part of China's drive towards a consumer-led economy and widely touted as major success stories. Online retail stocks such as 58.com tap into a growing demand for online retail in the country.

The move will have an impact on exchange-traded funds tracking MSCI's indices. They include db x-trackers MSCI China Index UCITS ETF (XCS6), Amundi ETF MSCI Emerging Markets UCITs ETF (AEEM), HSBC MSCI Emerging Markets UCITS ETF (HMEM) and iShares Core MSCI Emerging Markets (IEEM) as well as HSBC MSCI China (HMCH) and iShares MSCI China A (IASH).

 

China ADRs to be included in the MSCI Emerging Markets index

Company Sector/ industry
58.comE-commerce 
AlibabaE-commerce
BaiduOnline search engine
Ctrip.Com InternationalOnline travel 
JD.comE-commerce
Netease.comInternet tech 
New Oriental EducationTutoring company
Qihoo 360 Tech A Cyber security 
Qunar Online travel 
SoufunReal estate online portal 
TAL EducationTutoring company
VipshopOnline discount retailer 
Youku ToudouOnline video site
YY Social media 

Source: MSCI