BlackRock tips HK to be big winner in MSCI inclusion
Global asset manager BlackRock has tipped H shares and the Hong Kong market to be the big winners from future inclusion of China A shares in emerging market indices.
While attention has been focused on the benefits to the A-share market of its inclusion in EM indices, BlackRock said the impact on Hong Kong could be much greater due to additional flows from international managers.
And the asset manager has also predicted that further monetary easing could be on the cards this year, with China set to make more interest rate and reserve requirement ratio reductions in the coming months.
Helen Zhu, BlackRock’s head of China equities, yesterday maintained that the A-share market was not a bubble, despite some equities having seen substantial valuation growth over the past year.
At a briefing in Hong Kong she cited Shenzhen’s high-growth Chi-Next board where the price-earnings ratios on some stocks have soared above 100. But she added that many stocks on the overall A-share market were less than 20 times PE, providing pockets of value.
However, on a relative basis Zhu said that the H-share market – mainland Chinese firms listed in Hong Kong – was where the value was, because it had been such a “large laggard”.
While MSCI decided not to include A shares in its emerging markets indices earlier this month, it is widely expected to allow entry over the coming year. Zhu expects this to result in net inflows into Hong Kong from global investors, rather than flows heading northwards to make up A-share shortfalls, especially given mutual funds are considerably underweight China.
“As China’s weighting goes up incrementally we think that investors may think ‘well, if my weighting has gone up and my underweight has widened, do I flip the underweighting in China into A shares after it’s outperformed so much, or do I make up some of that A-share shortfall by allocating to Hong Kong?’ We think the latter is actually quite likely.”
She said that the relatively small size of the Hong Kong market was key – the value of its daily trades was currently around $10 billion, compared to daily A-share trading of $240 billion.
As a result, Zhu explained, if only a very small proportion of the index rebalancing money went to Hong Kong then the impact on the city’s market in terms of flows could be much more substantial than the impact on the mainland.
She added that in the event of a small partial MSCI inclusion, the flow benefits would be more of a boost to sentiment than a significant impact on A shares. There was likely to be in excess of $50 billion capital inflows into the A-share market, but since the market was trading $240 billion a day, this represented only a few hours of turnover.
Meanwhile at the same briefing Suanjin Tan, BlackRock’s Singapore-based portfolio manager for Asian credit, said that further easing in China was likely in 2015 after cuts to interest rates and the reserve requirement ratio (RRR).
He said that given inflation had been falling, authorities had more leeway for easing in order to stabilise the economy and prepare it for structural reforms without the risk of inflating a credit bubble. He predicted China would make somewhere in the region of two RRR cuts of 50bps each and two interest rate reductions of 25bps each before the end of 2015.