T. Rowe Price: MSCI’s China boost incentivises improved transparency

March 1, 2019

By Eric Moffett, Portfolio Manager of the T. Rowe Price Asian Opportunities Equity Fund

We welcome MSCI’s decision to increase the China A-share inclusion factor in its indices. Foreign institutional investors tend to take a longer-term, more fundamentals-based approach to investing than some sentiment-driven domestic retail investors. As the inclusion factor continues to rise over the long term, foreign institutional investors should have a greater influence on the price of blue-chip A-shares.

This should be a good incentive for local companies to increase the transparency of reporting practices and to adopt strategies that more firmly consider shareholders’ interest, as companies with better corporate governance are more likely to be owned by foreign investors. Many companies with good corporate governance practices in the market tend to have a strong foreign institutional investor base, who in general focus more on risk-adjusted returns over the long-term rather than absolute return potential in the short-term.

MSCI’s announcement should translate into some US$40bn worth of inflows from active funds, assuming these funds allocate money according to benchmark weight. While incremental, this is still rather small compared with the size of China’s domestic stock market, but we are very excited about the opportunity set in this market and its growing relevance to investors outside of Asia.

Foreign ownership of A-shares remains at low levels – hovering at just under 3% – but foreign ownership has been rising rapidly. Still, only half of Asia ex-Japan funds are currently invested in the asset class and many investors outside Asia still have little or no exposure to the market.

As in other markets, we believe our team of analysts can uncover hidden gems in China’s vast and inefficient domestic stock market, using the same rigorous fundamentals-based investment research process T. Rowe Price has honed over more than 80 years around the world.