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. 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 northbound funds totaled 13.865 billion yuan. Since passive funds benchmarked against MSCI Emerging Markets Index and others, 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 increased 1.92% to 11,527.62 points, and the ChiNext Index gained 2.33% to 2,405.08 points. Total trading volume across the two markets was 936.2 billion yuan. In terms of sectors, semiconductors, food and beverages, agriculture, and brewing stocks surged significantly, while grain concepts and consumer electronics remained active.

After-hours, several indices including the MSCI China A-shares Index officially reflected the adjustments, with stocks like China Shenhua, YTO Express (600233), Junshi Biosciences, Yangnong Chemical (600486), and GAC Group (601238) closing strong.

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 also boosted 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 33 specific measures across six areas, with clear division of responsibilities. The policies 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 cars with a purchase date between June 1 and December 31, with a price (excluding VAT) not exceeding 300,000 yuan and engine displacement of 2.0 liters or less.

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 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 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’s research department and fund manager of the HeRui series. “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 market may recover first. We still overweight upstream resource companies, some oversold auto industry 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, boosting the market. But at the same time, oil prices hit a new high of $119 per barrel, and inflation pressures continue to mount, which will weigh on global stock markets,” Wu Zhaoyin, Chief Macro Strategist at AVIC Trust, told reporters.

Wu Zhaoyin also sees some challenges ahead for the June stock market. 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, 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 limited—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 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.