MSCI index quarterly adjustment takes effect, with northbound funds net inflow approaching 14 billion yuan

[Institutions believe that A-shares still need to wait for the subsequent release of risks. “The MSCI index quarterly adjustment took effect in May, and on that day, northbound funds saw a significant inflow, driving the market higher. However, at the same time, oil prices also hit a new high of $119 per barrel, and inflationary pressures continue to rise, which will suppress global stock markets,” Wu Zhaoyin, Chief Macro Strategist at AVIC Trust, told reporters.]

The MSCI index quarterly adjustment for May officially took effect after the close on May 31. On that day, net inflows of 13.865 billion yuan were recorded from northbound funds. Since passive funds benchmarked against indices like the MSCI Emerging Markets Index, if A-shares were previously underweighted, passive rebalancing might have led to increased allocations.

On that day, the three major A-share indices rebounded after early lows in the morning, and strengthened in the afternoon. By the close, the Shanghai Composite rose 1.19% to 3,186.43 points, the Shenzhen Component increased 1.92% to 11,527.62 points, and the ChiNext Index gained 2.33% to 2,405.08 points, with a total trading volume of 936.2 billion yuan across the two markets. Sector-wise, semiconductors, food and beverages, agriculture, and brewing stocks surged significantly, while themes like grain concepts and consumer electronics remained active.

After-hours, several indices including the MSCI China A-shares Index officially reflected the adjustments, with stocks such as China Shenhua, YTO Express (600233), Junshi Biosciences, Yangnong Chemical (600486), and the newly added GAC Group (601238) experiencing late gains.

On May 13, MSCI announced its quarterly index adjustments for May, adding 28 stocks and removing 21 stocks from the MSCI China A-shares Index.

In addition to the MSCI quarterly adjustments, policy stimulus measures also contributed to the return of northbound funds. Meng Lei, a China strategist at UBS Securities, told reporters that since mid-May, macro policy support has been increasing, and market sentiment has been somewhat restored.

On the morning of May 31, the State Council announced a package of policies to stabilize the economy, including six areas with 33 specific measures and division of responsibilities. It reiterated the importance of controlling the pandemic, stabilizing the economy, and ensuring development safety. In the afternoon, the Ministry of Finance and the State Taxation Administration issued a notice to halve the vehicle purchase tax for certain passenger cars, specifically for models with a displacement of 2.0 liters or below, purchased between June 1 and December 31, with a price (excluding VAT) not exceeding 300,000 yuan.

Earlier, on May 25, a national teleconference was held to stabilize the economy. “The goal of this meeting is to encourage the market with positive policy signals and ensure that local and grassroots authorities prioritize stabilizing growth,” Meng Lei said. Regarding regional policies, Shenzhen has issued 30 measures to boost consumption, including a 15% subsidy on the sale price of home appliances and consumer electronics, and a subsidy of up to 10,000 yuan per vehicle for new energy vehicle buyers. “We expect more regional and local policies to promote consumption will be introduced soon, with subsidies likely to be larger than those in 2020.”

“Signs of policy support are clear, and we shifted to a more optimistic stance at the end of April,” said Li He, General Manager of YuDe Investment Research and fund manager of the HeRui series, a private equity firm with over 10 billion yuan in assets. “After the Shanghai Composite fell below 3,000 points, some risks have been released. With the improvement in pandemic control and the introduction of stimulus policies, sectors that experienced the largest declines and were most worried about by the outside world may recover first. We still overweight upstream resource companies, some oversold automotive industry stocks, and certain pharmaceutical and consumer companies.”

However, institutions believe that the A-share market still needs to wait for the release of further risks. “The MSCI index quarterly adjustment in May took effect, and on that day, there was a large inflow of northbound funds, which boosted the market. But at the same time, oil prices hit a new high of $119 per barrel, and inflationary pressures continue to rise, which will weigh on global stock markets,” Wu Zhaoyin, Chief Macro Strategist at AVIC Trust, told reporters.

Wu also pointed out that from the June market outlook, there are still some challenges. First, although the pandemic is controllable, resumption of work and production still requires time. Second, macro policies support the economy but their effects remain to be seen. Third, commodity prices remain high, and global inflation remains a concern. In April, CPI in the UK, US, Germany, and France reached 9.0%, 8.3%, 7.4%, and 4.8%, respectively. As China is a major importer of commodities, rising prices are transmitted domestically through imports, which warrants attention to their impact on the economy. Additionally, the Federal Reserve’s rate hikes are far from over, with further increases of 50 basis points expected in June and July, and the dollar’s appreciation trend continuing. Moreover, the financing demand in the A-share market is substantial, with about 100-150 billion yuan flowing monthly from IPOs, secondary offerings, rights issues, and issuance of convertible and exchangeable bonds, while the market lacks new funds. In May and April, new equity funds issued only 11.4 billion and 3.4 billion yuan, respectively.

He also expressed optimism about sectors benefiting from policy stimulation, such as high-quality real estate stocks (benefiting from adjustments in city-specific property purchase restrictions), auto stocks (benefiting from rural car sales), and essential consumer stocks (potentially benefiting from upcoming consumption vouchers).

Meng Lei believes that the static P/E ratio of the CSI 300 Index has fallen below one standard deviation of its five-year historical average. He expects A-share earnings to decline year-on-year again in the second quarter, possibly reaching the lowest point of the year. Once earnings revisions are largely complete, the A-share market will present a good opportunity.