MSCI index quarterly adjustment takes effect; Northbound funds net inflow approaches 14 billion

[ Institutions believe that the A-shares still need to wait for the release of subsequent risks. “The MSCI index quarterly adjustment officially took effect on May 31, leading to a substantial inflow of northbound funds that boosted the market. However, at the same time, oil prices hit a new high of $119 per barrel, and inflationary pressures continue to rise, which will suppress global stock markets,” said Wu Zhaoyin, macro strategy director at Zhonghang Trust. ]

The index adjustment by MSCI officially took effect after the market closed on May 31. Northbound funds had a net inflow of 13.865 billion yuan on that day. Since passive funds are benchmarked against indices like the MSCI Emerging Markets Index, if A-shares were previously under-allocated, there might be a situation of passive stock accumulation.

On that day, the three major A-share indices rebounded after hitting a low in the morning and surged in the afternoon. By the close, the Shanghai Composite Index rose by 1.19% to 3186.43 points, the Shenzhen Component Index increased by 1.92% to 11527.62 points, and the ChiNext Index climbed by 2.33% to 2405.08 points, with a total transaction volume of 936.2 billion yuan. In terms of sectors, semiconductors, food and beverages, agriculture, and liquor saw significant gains, while sectors like grain concepts and consumer electronics performed actively.

The adjustment results of several indices, including the MSCI China A-Share Index, officially took effect after the market closed, with stocks like China Shenhua, YTO Express (600233), Junshi Biosciences, Yangnong Chemical (600486), and the newly added GAC Group (601238) all seeing late-session rallies.

On May 13, MSCI announced its index quarterly adjustment results for May, specifying that 28 new stocks were added to the MSCI China A-Share Index while 21 stocks were removed.

In addition to the MSCI quarterly index adjustment factors, the increase in policy stimulus has also driven the northbound capital inflow. Meng Lei, a strategy analyst at UBS Securities, told reporters that since mid-May, the macro policy support has been continuously strengthened, leading to a recovery in stock market sentiment.

On the morning of May 31, the State Council announced a package of solid measures to stabilize the economy, outlining 33 specific policy measures and division of responsibilities across six areas, and reiterated the need to control the pandemic, stabilize the economy, and ensure safe development. In the afternoon of the 31st, the Ministry of Finance and the State Administration of Taxation issued a notice regarding the reduction of the vehicle purchase tax for certain passenger cars, halving the tax for passenger vehicles with a purchase date between June 1 and December 31 that have a price (excluding VAT) not exceeding 300,000 yuan and an engine displacement of 2.0 liters or less.

Previously, on May 25, a national teleconference on stabilizing the economy was held. “The purpose of this meeting was to encourage the market with positive policy signals and to ensure that local and grassroots managers prioritize stabilizing growth,” Meng Lei said. In terms of regional policies, Shenzhen has released 30 measures to boost consumption, including a 15% subsidy on the selling prices of home appliances and consumer electronics, as well as a subsidy of up to 10,000 yuan per vehicle for consumers of new energy vehicles. “We believe that more regional and local consumption-boosting policies will be launched soon, and the level of subsidies is expected to exceed those in 2020.”

“The signs of policy support are obvious, and we turned positive at the end of April,” said Li He, general manager of the research department of the billion-yuan private equity YuDe Investment and manager of the HeRui series funds. “After the Shanghai Composite Index previously broke below 3,000 points, some risks have been released. Now, with the improvement in pandemic control and the introduction of stimulus policies, the sectors that have fallen the most and have been of greatest concern to the outside world may recover first. We continue to overweight upstream resource products, some oversold companies in the automotive supply chain, as well as certain pharmaceutical and consumer companies.”

However, institutions believe that the A-shares still need to wait for the release of subsequent risks. “The MSCI index quarterly adjustment officially took effect on May 31, leading to a substantial inflow of northbound funds that boosted the market. However, at the same time, oil prices hit a new high of $119 per barrel, and inflationary pressures continue to rise, which will suppress global stock markets,” said Wu Zhaoyin, macro strategy director at Zhonghang Trust.

Wu Zhaoyin believes that there are still challenges in the stock market in June. First, while the pandemic is controllable, the resumption of work and production still requires time. Second, while macro policies have a stimulating effect on the economy, the effectiveness of these policies remains to be observed. Third, commodity prices remain high, and the shadow of global inflation lingers. In April, the CPI in countries like the UK, the US, Germany, and France reached 9.0%, 8.3%, 7.4%, and 4.8%, respectively. China is a major importer of commodities, and rising prices are transmitted to the domestic economy through imports, which needs to be monitored for its impact on the domestic economy. Moreover, the Federal Reserve’s interest rate hike process is far from over, with further increases of 50 basis points expected in June and July, and the trend of dollar appreciation remains unchanged. Additionally, the financing demand for A-shares is significant, with approximately 100 billion to 150 billion yuan flowing from the stock market to the industry each month through methods such as IPOs, additional issuances, rights issues, and the issuance of convertible and exchangeable bonds, while the stock market lacks new funds, with only 11.4 billion and 3.4 billion yuan in new equity fund issuances in April and May, respectively.

However, he also stated that, at present, he is optimistic about undervalued sectors that benefit from policy stimulus, such as blue-chip stocks in real estate (benefiting from adjustments to various cities’ real estate purchase restrictions), automotive stocks (benefiting from rural vehicle purchases), and essential consumer stocks (expected to benefit from potential consumer vouchers that may be introduced).

Meng Lei believes that the static price-to-earnings ratio of the CSI 300 index has fallen below one standard deviation of the historical average over the past five years, and it is expected that A-share earnings will once again show negative year-on-year growth in the second quarter, which may represent the annual low point. After the current round of earnings downgrades is basically completed, the A-share market will welcome a good opportunity.

(Article by: Yue Quanli HN152)

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