23 October 2016
About US$70 billion is expected to flow into US-listed Chinese companies included recently in two MSCI indexes. Photo: Reuters
About US$70 billion is expected to flow into US-listed Chinese companies included recently in two MSCI indexes. Photo: Reuters

How to gain from US-listed China firms included in MSCI indexes

Market index provider MSCI Inc. has announced the inclusion of 14 US-listed Chinese companies in its MSCI Emerging Markets Index and MSCI China Index.

Alibaba, Baidu, Ctrip and are among the stocks included. The index restructuring will be done in two steps, one in November and the other in May, to avoid volatility.

At present, funds worth about US$1.5 trillion track the MSCI Emerging Markets Index.

The weight of Chinese companies in the index will increase to 26 percent from 23 percent after the inclusion.

The market expects an inflow of US$70 billion, mostly from institutional investors with an active strategy, to those Chinese companies.

Since the majority in this batch are technology and internet companies, they will replace banking as the largest sector in the MSCI China Index.

This reflects the restructuring of China’s economy, from an “old economy” driven by financial, telecom and resource industries to a technology-driven “new economy”.

The A-share index rose faster than overseas-listed Chinese companies in April and May, but the latter outperformed during the deep correction in the A-share market in June and July.

The FTSE China N Share Indexes, which track US-listed Chinese companies, rose over 25 percent from Sept. 30 to Oct. 30.

In the past two months, some of these companies had some notable performances.

On Oct. 16, Alibaba proposed to take over Youku Tudou, boosting the latter’s share price by 23.8 percent on that day.

On Oct. 26, Ctrip soared about 20 percent while Qunar jumped over 30 percent after the announcement that Baidu has reached a share swap deal with Ctrip, who is a big shareholder of Qunar.

On Nov. 11, Alibaba reported a 60 percent increase in sales from its Singles’ Day online shopping festival. Several other US-listed Chinese firms reported results that beat analyst estimates.

Meanwhile, the price-to-earnings multiple of overseas-listed Chinese companies is generally lower than that of Google, Amazon, Netflix, Yelp and some other US-listed technology firms.

Online-to-offline businesses in the mainland has become an indispensable part of people’s lives.

Although investors living in Hong Kong may not have a chance to experience how good those O2O services are, buying exchange-traded funds may allow them to benefit from the inclusion of Chinese internet and technology stocks in MSCI indexes.

This article appeared in the Hong Kong Economic Journal on Dec. 1.

Translation by Myssie You

[Chinese version中文版]

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