Behind The Biggest Expansion Of A Shares In MSCI: Foreign Investment Has Become The Third Pole Of Institutional Investors.

Closing in November 25th, the net inflow of northbound capital did not expect to reach the peak of the recent scale. The net inflow of funds amounted to 7 billion yuan on that day, and it was undoubtedly the third step of November 26th A share expansion in the MSCI index.

The expansion has multiple meanings. After the expansion, A shares completed the final step of MSCI expansion in the year. At the same time, it also drew a good conclusion for the internationalization process of A shares this year. On the other hand, due to the first expansion of the expansion into the central shares, the incremental foreign capital brought by the expansion is also the most frequent.

At the same time, the MSCI expansion also triggered two discussions in the market. First of all, it took a big step forward in the 2019 A share internationalization, and whether it can continue this trend. The second point is whether foreign investment has become an important pole of the domestic market investors, which has a huge impact on market research, investment style and so on.

Important third pole of institutional investors

The expansion is the largest single expansion in the year. It will be implemented after the close of November 26th. The proportion of A shares that has been incorporated into MSCI will be increased from 15% to 20%, and the new share will be directly incorporated into the 20% share. After the completion of the expansion, the weights of A shares in the MSCI China Index and MSCI emerging market index will reach 12.1% and 4.1% respectively.

Compared with previous expansion, the adjustment in the four quarter has been given the highest attention by the market. The important factor is that the expansion will be included in the central shares for the first time.

According to the latest list released by MSCI, after the expansion was completed, it included 244 large cap stocks of MSCI and 228 stocks. In the central stock market, 39 were transferred to the central stock market for the previous large cap stocks, and the other 189 intermediate stocks were all included for the first time. If compared with the August announcement, the 33 listed companies will be included in the central shares. From this point of view, the expansion of the first A shares belong to a total of 204.

Another factor that gives the market great importance to the expansion is that the incremental funding this time will be the most frequent expansion. According to the calculation, the total size of this index adjustment for A shares is about 35 billion -400 billion, or about 250 billion -3000 billion yuan.

Undoubtedly, this year's expansion and the A share officially incorporated into the other two international indexes have brought considerable incremental funding.

In a public speech last weekend, Li Chao, vice chairman of the securities and Futures Commission, also disclosed an official data that A shares were smoothly incorporated into the international indexes such as FTSE Russell and standard & amp; Dow Jones. This year, foreign capital has continued to flow into China's stock market and bond market, of which more than 240 billion yuan has been inflow into the stock market, showing the confidence of international investors in China's capital market reform and long-term healthy development of the economy.

Under the background of foreign capital's large-scale allocation of domestic rights and interests market, foreign capital is becoming an important force in A share institutional investors.

According to the statistics of Xingye securities, as of September 2019, according to available data, the market capitalization of institutional investors in A shares has exceeded 6 trillion, accounting for 11% of the total market capitalization of all A shares, 14% of the market value of circulation, and 28% of the market value of free circulation.

Specifically, the market capitalization of public offering funds exceeds 2 trillion, while foreign investors hold nearly 1 trillion and 800 billion of stocks, and long-term capital holdings represented by insurance and social security are over 1 trillion and 500 billion, while other institutions are about 800 billion.

"Compared with the data from the previous year, the market value of A shares held by foreign investors is close to 1 trillion and 800 billion, accounting for 3% of the total market value of the total A, and 8% of the market value of free circulation. Foreign investors have become an important influence on the pricing power of A shares, showing a three stand trend with public offerings, insurance and social security. With China's financial opening up, foreign investors are further expanding their pricing power in A shares, especially as an important influence on the pricing power of core assets. If in the next 5-10 years, MSCI, FTSE Russell and other A shares achieve 100% of the total, the size of A shares will be 480 billion USD (130 billion of them are passive funds). Societe Generale Securities chief strategist Wang Delun think.

Foreign capital has become an important third pole of institutional investors, and it also has a great impact on the capital market derived ecology.

"Foreign capital has become the three largest institutional investor in A shares, which is comparable to the volume of public offering, insurance and social security. It is gradually affecting the traditional investment philosophy and ecology of A shares, resulting in a change from "quantitative" to "qualitative change". Specifically, we believe that the subversion of A shares by foreign capital will have an impact on the traditional ecological environment of A share research, valuation and investment at three levels. Wang Delun said.

Especially in terms of investment system, investors in A stock market in the past 20 years are more concerned about short-term thinking such as "marginal change" and net profit. "In the process of studying the behavior of foreign investors, we find that foreign capital is more concerned with the indicators of ROE, cash flow and ROIC at the enterprise level. In the future, we believe that investors will pay more attention to marginal thinking, net profit growth and change and aggregate thinking. Investors will pay more attention to the balance of ROE and increase the weight of aggregate thinking instead of focusing on short-term net profit changes.

Lu Zheng commissar, chief economist of Societe Generale, thinks that foreign capital increases the proportion of A shares. From the behavior of foreign investors who have entered the domestic market, they are not very different from mainland investors. Their investment horizon is longer, and their concerns are not short-term factors. Therefore, improving the proportion of foreign capital allocation is conducive to optimizing the domestic investor structure.

Slowdown in internationalization process

In retrospect, the internationalization process of A shares in 2019 was orderly landing, and completed the three steps in the expansion of MSCI index respectively, and the first time the first two international indexes of FTSE Russell and S & P Dow Jones were first introduced.

After entering 2020, A has been identified as the third step in the first stage of the FTSE Russell index to be implemented. That is to say, the proportion of A shares in FTSE will continue to increase in March 2020, when the A share will reach 25%, and the proportion of the emerging market index of the FTSE Russell index and the global market index will reach 5.57% and 0.57% respectively. But compared with 2019, the process of internationalization of A shares should be slowed down, especially in the MSCI index.

"Whether from the Korean experience or the current constraints on the proportion of A shares to continue to increase, it is expected that after the completion of the MSCI expansion in November, the A shares will be brought into the MSCI process for a short period or a slowdown, and the passive incremental funding brought about by the expansion will be weakened in 2020. However, the increase of foreign capital A shares is a relatively definite trend in recent years. Incremental foreign investment can still be expected, but the scale may drop slightly. Zhang Xia, chief strategist of China Merchants Securities, said.

Among the constraints mentioned by Zhang Xia, the richness of domestic market risk management tools is an important bargaining chip. According to the current research and feedback, it is an important reason for foreign investors to hesitate to supply the risk management tools in the domestic market.

Corresponding to the overseas market, there are three stock index futures and Shanghai 50ETF options in the domestic A share derivatives, and the Shanghai and Shenzhen 300ETF options to be launched immediately. However, compared with the overseas market, the A stock derivatives currently offered by domestic exchanges are not rich enough to satisfy the needs of investors' management risk as a whole.

However, according to reporters, regulators have made great efforts in enriching derivatives products this year, and some products that have been waiting for many years have been approved in the near future.

Based on the above situation, Zhang Xia predicted: "in 2020, the A share will continue to be included in the international index process. If the hedging tools continue to operate on a regular basis next year, they can provide more effective hedge tools for overseas institutional investors, and do not rule out the possibility of MSCI expanding the expansion plan. However, in view of the fact that it will take 8 months or so to land on the ground, if MSCI puts forward suggestions for expansion in the quarterly adjustment of the first quarter of 2020, it will be possible to continue expansion next year. In addition, September 2020 is an important time to observe the expansion of the A share index by the FTSE Russell index. Taking into account the expansion of the arrangements to the final implementation still need a certain time interval, the first phase of the FTSE Russell index is completed, and the probability of further expansion in 2020 is not high.