MSCI index quarterly adjustment takes effect; Northbound funds net inflow approaches 14 billion

[ The institution believes that A-shares (China’s mainland stock market) still need to wait for the release of subsequent risks. “The MSCI May index quarterly adjustment took effect officially on May 5, and on that day northbound capital saw a sharp inflow, driving the broad market higher. But at the same time, oil prices also hit a new high of $119 per barrel, inflation pressure continues to rise, which will weigh on global equities.” Wu Zhaoyin, macro strategy director at AVIC Trust, told a reporter. ]

The quarterly index adjustment of MSCI’s May index by the index-compiler took effect officially after the close of trading on May 31. On that day, northbound capital net inflowed RMB 13.87B. Since passive funds use benchmarks such as the MSCI Emerging Markets Index, if A-share allocation had been too low previously, passive funds may have been forced to add positions.

That day, the three major A-share indices found a bottom and rebounded early in the morning, then surged strongly in the afternoon. By the close, the Shanghai Composite rose 1.19% to 3,186.43 points, the Shenzhen Component rose 1.92% to 11,527.62 points, and the ChiNext Index rose 2.33% to 2,405.08 points; total trading across both markets amounted to RMB 936.2 billion. In terms of sectors, semiconductors, food and beverage, agriculture, liquor-making, and other sectors rose sharply, while themes such as grain and food concepts and consumer electronics performed actively.

After the close of trading, results of adjustments to multiple indices, including the MSCI China A-share Index, took effect officially. China Shenhua, SF Express (600233), Innovent Biologics, Yangnong Chemical (600486), as well as the newly added constituent, GAC Group (601238), among other stocks, saw rallies at the end of the trading session.

On May 13, MSCI released its May quarterly index adjustment results. Specifically for the MSCI China A-share Index, 28 new constituents were added, and 21 stocks were removed.

In addition to the factors related to MSCI’s quarterly index adjustment, policy stimulus further added momentum, also pushing northbound capital to return. Meng Lei, a China strategy analyst at UBS Securities, told a reporter that since mid-May, the intensity of support from macro policies has continued to increase, and sentiment in the stock market has recovered somewhat.

On the morning of May 31, the State Council released a package of measures to solidly stabilize the economy, proposing six areas with 33 specific policy measures and arrangements for division of responsibilities, and reiterating that疫情 must be kept under control, the economy must be kept stable, and development must be secure. On the afternoon of May 31, the Ministry of Finance and the State Taxation Administration issued a notice on reducing the purchase tax on certain passenger vehicles. For passenger vehicles with a purchase date between June 1 and December 31 and with a single-vehicle price (excluding value-added tax) not exceeding RMB 300k, with engine displacement of 2.0 liters and below, the vehicle purchase tax will be halved.

Previously, on May 25, the national television conference on stabilizing the economy’s broad base was held. “The meeting aimed to encourage the market with positive policy signals, and to ensure that local and grassroots administrators place stabilizing growth in a more prominent position,” Meng Lei said. On the regional policy front, Shenzhen has already issued 30 measures to boost consumption, including a 15% subsidy to the sales price of home appliances and consumer electronics purchased by consumers, as well as subsidies to consumers of new energy vehicles of up to no more than RMB 10k per vehicle. “We believe that more consumption-boosting policies at the regional and local levels will be rolled out in the near term, and that the subsidy intensity is expected to be greater than in 2020.”

“The signs of policy support are obvious; we started to shift to a more positive stance at the end of April.” Li He, general manager of the research department at Yude Investment (a private fund firm with assets over RMB 300k) and fund manager of the He Rui series, told a reporter, “After the Shanghai Composite previously fell below 3,000 points, some risks had already been released. Now, with the improvement in the situation regarding COVID-19 containment and the introduction of stimulus policies, the sectors that fell the most earlier and had attracted the greatest concern from outside may revive first. We remain overweight in upstream resources, some undervalued auto-industry chain companies, as well as certain medical and consumer companies.”

However, institutions believe that A-shares still need to wait for the release of subsequent risks. “The MSCI May index quarterly adjustment took effect officially on May 5, and on that day northbound capital saw a sharp inflow, driving the broad market higher. But at the same time, oil prices also hit a new high of $119 per barrel, inflation pressure continues to rise, which will weigh on global equities.” Wu Zhaoyin, macro strategy director at AVIC Trust, told a reporter.

Wu Zhaoyin believes that in terms of the stock market outlook in June, there are still some challenges. First, although the epidemic is controllable, reopening and resuming production still need time. Second, macro policies will pull on the economy, but the effects of those policies still need to be observed. Third, commodity prices remain high, and global inflation shadows have not lifted. In April, the CPIs in countries such as the U.S., the U.K., Germany, and France were as high as 9.0%, 8.3%, 7.4%, and 4.8% respectively. China is a major importer of commodities, and the rise in commodity prices is transmitted to the domestic economy through channels such as imports; the impact on the domestic economy needs to be watched. Moreover, the process of Federal Reserve rate hikes is far from over; in June and July, it will continue to raise rates by 50 basis points, and the trend of dollar appreciation has not changed. In addition, A-shares have strong financing needs. Each month, around RMB 100 billion to 150 billion of funds flow from the stock market to industry through IPOs, seasoned offerings, rights issues, issuing convertible bonds and exchangeable bonds, etc. Meanwhile, the stock market lacks newly added capital, and in April and May, net issuance of equity-fund types was only RMB 11.4 billion and RMB 3.4 billion.

But he also said that, based on current views, he is optimistic about sectors with low valuations that benefit from policy stimulus—for example, real estate “blue-chip” stocks (benefiting from adjustments to housing purchase restrictions in each city), auto stocks (benefiting from “buying cars to go to the countryside” programs), and stocks in essential consumption (expected to benefit from potentially issued consumption vouchers).

Meng Lei believes that the static price-to-earnings ratio of the CSI 300 index is already more than one standard deviation below the historical average over the past five years. He expects that in the second quarter, A-share earnings will again show year-on-year negative growth, and may also be the annual low point. After this round of earnings downgrades is basically completed, the A-share market will have an opportunity.

(Editor: Yue Quanli HN152）

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