Despite global trade and tariff tensions, one of the world’s biggest indexers is pushing ahead with plans to include mainland China stocks in its indexes. That means investors in most global funds will be owning more China stocks in the next few years.
It couldn’t come at a better time for China. The trade wars have been brutal on the country’s stock market, with the Shanghai exchange, the nation’s largest, down 17 percent in 2018. China’s stock market boosters would love the additional investment from foreign investors to help them in a difficult year.
“The mainland China stock market is mostly owned by retail investors, so it is very driven by sentiment,” said Brendan Ahern, who runs the KraneShares MSCI China A Shares ETF, a basket of mainland China stocks (known as “A Shares”). “Those retail investors are really worried about trade wars, so this foreign investment will help institutionalize the market and slowly make it more dominated by professional investors.”
MSCI on Friday initiates the second leg of its multiyear plan to incorporate China mainland stocks into its global stock indexing system. Active and passive managers use MSCI to determine their investment universe. Many index funds and ETFs are directly benchmarked to MSCI indexes. The widely followed indexes are used as benchmarks for many global ETFs and mutual funds, including the Emerging Markets ETF and the iShares MSCI All World ETF.
At the close of the market, indexers are going to have to buy mainland China stocks and sell those from other parts of the world.