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MSCI News Has Meaningful, Long-Term Implications

Ben Johnson, CFA

Ben Johnson: The big news in index land this week was the outcome of MSCI's annual index review. MSCI announced that, for the first time, it would be including China A-Shares in its Emerging Markets Index. Now China A-Shares are domestically listed, domestically traded Chinese stocks that previously have been mostly unavailable to foreign investors. Over time, what we've seen is that China has gradually opened up its capital markets via a number of different means. This is the most meaningful, incremental step yet we've seen to date in this gradual development of the opening of Chinese markets to offshore investors.

Now, the immediate implications of this announcement for investors are minimal at best. A-shares will be gradually included in the MSCI Emerging Markets Index and the MSCI All Country World Index, and added to the portfolios of ETFs and index mutual funds that track these benchmarks. The ultimate magnitude of this on investors' portfolios as represented by these funds that track these indexes is quite small. On a pro forma basis, what you see is about three quarters of 1% of an MSCI Emerging Markets Index-tracking portfolio, will in theory be allocated to China A-shares.

While the near term impact is limited, it's important to stress that longer term what this represents is the latest step down the path toward the opening of the Chinese market to foreign investors. Longer term, this could have very meaningful implications for investors of all stripes, all around the globe, as one of the world's largest equity markets further opens its doors to investors from overseas.