China A shares included in MSCI

A lot of turbulence in the markets last week as Spain and Italy both finished with new leaders. The U.S. confirmed the implementation of tariffs on the EU, Canada, and Mexico after temporary exemptions expired June 1. While on the data front, US Non-Farm Payrolls and ISM were both much stronger than expected, solidifying the prospect for a rate hike at the next FOMC meeting June 14 at 4.00am AEST. 

Lost in the excitement, was the official inclusion of China A-shares in the MSCI Emerging Markets Index. The decision to include yuan-denominated China A-shares follows an announcement by MSCI in June 2017. While the initial China A-share weighting in the MSCI will represent less than 1%, there is an expectation the weighting of China A-shares will account for 20% of the index by 2030. 

The market capitalization of China A-shares is around “USD 8 trillion, second only to the U.S and around 30 percent bigger than the euro area” according to Allianz Global Investors. The decision by MSCI to include China A-shares in the index, follows the successful launch of China’s Stock Connect schemes, which allows investors to use local exchanges to trade shares on cross-border counterparts. Before this, it was difficult for foreign investors to gain access to the A-Share market. A reason why foreign ownership of China A-shares is thought to be less than 2%, and why in the past foreign investors have been more focused on the smaller Hong Kong Exchange listed H-shares.

One of the key benefits of China A-shares is their very low correlation with other global indices, thereby bringing diversification benefits to portfolios, not to mention China is forecast to overtake the US as the world’s largest economy by 2030. For Australian investors, an offsetting consideration to this is the Australian economy, and Australian investors have exposure to the Chinese economy which takes approximately 30% of total Australian exports. 

For those investors who like the idea of exposure to China A-shares, however, are unsure precisely what shares to buy, might consider trading the China A50 which is a CFD over the China A 50 Index. The China A50 Index is a stock market index that is made up of 50 China A-shares including names such as Bank of China, Baoshan Steel, Citic Securities, Ping An Insurance to name but a few.

Turning to the charts, the China A50 CFD made a high early in 2018 before suffering a sharp fall in February of approximately -18%. While other major global indices have all bounced back in varying degrees, the China A50 made marginal new lows for the year last week, before a minor rebound to finish the week. From a technical point of view, last weeks low at 12011 was ahead of the key 12000 level that has provided support on at least three prior occasions over the past six weeks. 

Providing the China A50 continues to hold above the 12000 support region and then closes above the downtrend coming in at 12500 from the January high, it would be a positive development. Further confirmation that a bullish move is underway would be a daily close above the 200-day moving average and the highs from April in the 13000 region.

In summary, given the favorable fundamental and technical backdrop mentioned above, it warrants a cautiously bullish stance on the China A50 at current levels. This view remains in place, providing the key support at 12,000 continues to hold on a closing basis. Confidence in the bullish view would increase on a close above 12500 and then 13000.

Source Tradingview. The figures stated are as of the 4th of June 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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