What China’s Inclusion On Global Indices Means For the ASX


Speculation last month that Chinese stocks would be included on MSCI’s global index ended in disappointment. MSCI eventually decided Chinese stocks weren’t ready. But it isn’t final. Negotiations are ongoing, though it’s unclear what hurdles China’s stock market still has to clear. As it stands, the influential global index publisher is working with the Chinese to remove the remaining barriers to their inclusion.

But one thing remains certain. China’s US$9 trillion stock market is destined to join global indices. And when it does, it could have major ramifications for the ASX.

China’s inclusion on global indices will shift the global financial centre closer towards Australia. But that’s a problem as much as it is an opportunity. Specifically, its presence could suck out investment from the ASX, sending it in the direction of China. Potentially, that could turn the ASX into a regional backwater. Investment bank Credit Suisse explains:

While the Asian pond will expand considerably over the next 10 years, Australia will be a smaller fish within it’.

For one, China’s current market size would send their share of global indices up from 1% to 9%. Equally, their share of regional indices would expand accordingly. Credit Suisse estimates that this could halve Australia’s share of regional indices from 18% to 9%. In other words, investors could potentially shift up to $140 billion worth of stocks out the ASX. That would reduce the ASX’s market cap by a staggering 10%.

This means that globally indexed Chinese stocks will pose challenges to local investors in the long run. Hundreds of billions of dollars exiting the ASX is enough to warrant real concern about the stability of the stock market.

But it’s not just investors that would jump at new investment opportunities in China. Aussie superannuation funds could be equally active on Chinese markets.

Why Aussie Super is set to make a splash on Chinese stocks

Once Chinese stocks join global indices, MSCI’s head of Asia-Pacific Ted Niggli expects that it will result in a wave of Aussie super funds investing into Chinese stocks. He may very well be right, considering the recent trends in global investment strategies.

The first trend is that investment strategies are becoming passive. This just means that they’re starting to track global indices at a lower cost. This hands-off approach would result in a number of Aussie funds jumping ship.

The other, as he points out, is a drive to reduce the bias towards local funds investing domestically. Currently, most Aussie portfolios have a 50-50 split between domestic and global stocks. Mr Niggli expects this to change:

The big bet on [Aussie stocks] has been the right bet based on currencies, but [performance wise in the past three years] there should be a reduction’.

He says that many mature investors around the world have removed biases towards their domestic market in their portfolio. Instead, they’re now more willing to invest wherever it makes the most sense for returns.

A passive strategy, combined with a more global investment outlook, could prompt a significant portion of the $2 trillion worth of Aussie super to move into Chinese stocks in the coming years.

Why? Chinese stocks are not only lower cost options, but the market’s performance has been very strong in recent years. The Shanghai Composite Index has doubled in the past year. And despite last week’s correction, which sent the SCI tumbling by 13%, the trend for Chinese stocks been positive nonetheless.

What’s more, China’s inclusion on the MSCI’s index is set to provide a huge boost to the stock market as global investors rush in.

For many superannuation funds, it means they’ll need to get their act together. Currently, very few funds have the infrastructure in place to invest in Chinese stocks. But those that do are likely to benefit from what will be one of the most attractive, low cost global indices.

So when can we expect this to happen? MSCI could take the market by surprise. They have stated on a number of occasions that China’s inclusion on their global index is a formality. Interestingly, they’ll go against standard practice by not waiting until its annual review to give the greenlight. That means Chinese stocks could be added to their index at a moment’s notice. Local investors and fund managers should be preparing themselves for that day. The months following China’s inclusion could be some of the worst the Aussie stock market has seen in years.

Mat Spasic,

Contributor, The Daily Reckoning

PS: Speculation over the future of the ASX has been rife in recent months, amid losses across the banking sector. That sell off caused some observers to question whether it was the last we’d see of it this year. Now that a global index for Chinese stocks appears imminent, we could see a severe decline in the ASX’s fortunes.

The Daily Reckoning’s Vern Gowdie thinks we’re on course for a major correction in equities. Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of Australia’s Top 50 financial planners. He believes we’re set for a catastrophic crash in stocks in the future. And he thinks the ASX could lose as much as 90% of its $1.8 trillion market cap.

Vern wants to help you avoid the coming wealth destruction. That’s why He’s written ‘Five Fatal Stocks You Must Sell Now’. In this free report, he’ll show you which five blue chip Aussie companies could destroy your portfolio — and you almost certainly own one of them. To find out how to download the report, click here.

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The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.

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