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

[The institutions believe that A-shares still need to wait for the subsequent release of risks. “The MSCI index quarterly adjustment took effect in May. 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 inflation 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 in May officially took effect after the close on May 31. On that day, net inflows of 13.865 billion yuan from northbound funds. Since passive funds benchmarked against indices like the MSCI Emerging Markets Index, if A-shares were previously underweighted, passive buying may have occurred.

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 trading volume 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 performed actively.

After-hours, multiple 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) rallying at the close.

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.

Besides the MSCI quarterly index adjustments, policy stimulus measures also boosted northbound funds. Meng Lei, China Strategy Analyst 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, reaffirming the need to prevent pandemic risks, stabilize the economy, and ensure 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. For cars purchased between June 1 and December 31, with a price (excluding VAT) not exceeding 300,000 yuan and engine displacement of 2.0 liters or below, the purchase tax will be reduced by half.

Earlier, on May 25, a national 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 price of home appliances and consumer electronics, and a subsidy of up to 10,000 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 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 auto industry chain stocks, and certain pharmaceutical and consumer companies.”

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

Wu Zhaoyin believes that the June stock market still faces some challenges. First, although the pandemic is controllable, resumption of work and production still takes time. Second, macro policies can stimulate the economy, but their effects remain to be seen. Third, commodity prices remain high, and global inflation clouds persist. 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. 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 continues to appreciate. Additionally, A-shares have high financing needs, with about 100-150 billion yuan flowing from the stock market into industries each month via IPOs, secondary offerings, rights issues, and issuance of convertible and exchangeable bonds, while new funds in the stock market are lacking—only 11.4 billion yuan and 3.4 billion yuan were issued in May for equity funds.

Nevertheless, he also expressed optimism about undervalued sectors benefiting from policy stimulus, such as blue-chip stocks in real estate (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 below its five-year average, and expects A-share earnings to decline year-on-year again in the second quarter, possibly reaching the annual low. After this earnings correction cycle is largely complete, the A-share market will present a good opportunity.