Higher Chinese weighting in MSCI index will have ‘limited’ impact on Saudi inflows: Arqaam Capital

The announcement by the index provider MSCI to increase China A’s weight in Emerging Market (EM) index to 3.3 percent from 0.7 percent is likely to have a limited impact on the inclusion of Saudi Arabia in the MSCI EM Index later this year, Arqaam Capital said in a report on Sunday.

In December 2018, the report said, MSCI launched a consultation proposing to increase China A’s weight in its EM indexes on the back of a successful initial implementation in 2018 where Large Cap China A shares were added to the MSCI indexes with a 5 percent factor.

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The proposal suggested that MSCI would increase the inclusion factor of large cap stocks to 20 percent, would include large cap ChiNext shares with a 20 percent inclusion factor, as well as mid cap China A shares with a 20 percent inclusion factor, Arqaam Capital added in the report.

MSCI has now announced that it will go ahead with this weight increase, almost in-line with the initial proposal, over three phases during the upcoming index reviews in 2019.

“MSCI EM China A weight to be increased over three phases to around 3.3 percent from the current 0.7 percent, resulting in about $12.7 billion of inflows, coinciding with Saudi Arabia (around 2.7 percent weight) and Argentina (around 0.3 percent) EM inclusions,” the report said, adding that “the announcement will have a limited impact on Saudi Arabia’s inclusion, only bringing down expected total passive inflows to around $13.3 billion from $13.5 billion.”

The announcement is also likely to have limited impact on the Middle East & Africa region as outflows were already expected in May and August, Arqaam Capital report said.