MSCI index quarterly adjustment takes effect; Northbound funds net inflow of nearly 14 billion yuan

[ The institutions believe that A-shares still need to wait for the subsequent release of risks. “The MSCI index quarterly adjustment in May officially took effect. On that day, northbound funds saw a significant inflow, driving the market higher. But 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, Director of Macroeconomic Strategy at AVIC Trust, told reporters. ]

The index compilation company MSCI’s quarterly index adjustment in May officially took effect after the market close on May 31. On that day, net inflows of 13.87B yuan from northbound funds. Since passive funds benchmarked against indices like MSCI Emerging Markets, if the allocation to A-shares was previously too low, passive buying may occur.

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 rose 1.92% to 11,527.62 points, and the ChiNext Index increased 2.33% to 2,405.08 points, with a total turnover of 936.2 billion yuan. In terms of sectors, semiconductors, food and beverages, agriculture, and brewing stocks surged significantly, while grain concepts and consumer electronics sectors performed actively.

The results of the MSCI China A-shares index and several other indices’ adjustments officially took effect after trading hours. China Shenhua, YTO Express (600233), Junshi Biosciences, Yangnong Chemical (600486), and the newly added GAC Group (601238) all saw late-day surges.

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

In addition to the MSCI quarterly index adjustments, policy stimulus measures have also boosted northbound funds. Meng Lei, a China strategist at UBS Securities, told reporters that since mid-May, macro policy support has been continuously strengthened, 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, proposing six areas with 33 specific policies and division of responsibilities, reaffirming that pandemic control, economic stability, and development safety are priorities; in the afternoon, the Ministry of Finance and State Taxation Administration issued a notice on halving the vehicle purchase tax for some passenger cars, for cars purchased between June 1 and December 31, with a price (excluding VAT) not exceeding 300k yuan and engine displacements of 2.0 liters or less.

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

“Signs of policy support are obvious, and we shifted to a more positive stance at the end of April,” said Li He, General Manager of YuDe Investment’s research department and fund manager of the HeRui series, a private equity firm with over 100 billion yuan in assets. “After the Shanghai Composite fell below 3,000 points, some risks have been released. Now, with the improvement in pandemic control and the introduction of stimulus policies, sectors that experienced the largest declines and were most worried about externally may recover first. We still overweight upstream resource companies, some oversold auto industry chain firms, and certain pharmaceutical and consumer companies.”

However, institutions believe that A-shares still need to wait for the subsequent release of risks. “The MSCI index quarterly adjustment in May officially took effect. On that day, northbound funds saw a significant inflow, driving the market higher. But 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, Director of Macroeconomic Strategy at AVIC Trust, told reporters.

Wu Zhaoyin believes that, looking at the stock market in June, there are still some challenges. First, although the pandemic is controllable, resumption of work and production still requires time. Second, macro policies have a pulling effect on the economy, but their effectiveness remains to be seen. Third, commodity prices remain high, and the global inflation outlook is still uncertain. In April, CPI in the UK, US, Germany, and France reached 9.0%, 8.3%, 7.4%, and 4.8%, respectively. China, as a major importer of commodities, sees rising prices transmitted domestically through imports, which warrants attention to their impact on the economy. Moreover, the Federal Reserve’s rate hikes are far from over, with another 50 basis point increase expected in June and July, and the dollar’s appreciation trend continues. Additionally, A-shares have high financing needs, with about 100-150 billion yuan flowing into the market each month through IPOs, secondary offerings, rights issues, and issuance of convertible and exchangeable bonds, while new funds in the stock market are lacking, with only 11.4 billion and 3.4 billion yuan issued in May for equity funds.

However, he also stated that he is optimistic about undervalued sectors benefiting from policy stimulus, such as blue-chip stocks in real estate (benefiting from adjustments to city-specific property purchase restrictions), auto stocks (benefiting from rural car sales), and essential consumer stocks (expected to benefit from potential consumer 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, and expects A-share profits to decline year-on-year again in the second quarter, possibly reaching the lowest point of the year. After this earnings revision cycle is basically complete, the A-share market will present a good opportunity.