Guosheng Strategy: A detailed explanation of MSCI score adjustment and impact

Guosheng Strategy: A detailed explanation of MSCI score adjustment and impact

Source: Looking Backward, 1. MSCI Index Fractional Share Adjustments Explained In the MSCI system, are some indexes related to A shares?

The MSCI index system is very complex. There are eight series of currently recognized investment indexes in the world, including national indexes, market value indexes, theme indexes, industry indexes, style indexes, factor indexes, customization, and ESG.

Among them, there are also many indexes directly or indirectly related to A shares, including MSCI China Onshore 重庆耍耍网 Index (former MSCI China A Share Index), MSCI China All Share Index (former MSCI All China Index), and so on.

But these indexes are basically Chinese exclusive indexes for domestic or foreign investors, and their tracking funds and influence are relatively limited.

The index series that has the most impact on A shares and the market is the most concerned is the MSCI Global Standard Index, including flagship indexes such as MSCI ACWI and MSCI EMI.

  Existing A shares divided by the MSCI Global Standard Index?

Since MSCI announced that it had previously suspended A shares in 2017, the MSCI Global Standard Index has expanded the A shares several times in 2018-2019. The first phase of the expansion plan has been completed by the end of November 2019.

The A-share splitting factor has been increased from 0 to 20%, and the range of addition to the target has continued to expand from the initial 220 large-cap stocks.

As of the latest (20200213), a total of 474 A-shares have been assigned the MSCI Global Standard Index, including 339 main boards, 95 small and medium boards, and 40 GEM stocks.

  MSCI component adjustment method and judgment basis.

For A shares, the adjustment of MSCI mainly involves two aspects: first is the quarterly adjustment of the MSCI official case, that is, the index score will be scored in the middle of each quarter (mid February / mid May / mid August / mid November)Stocks are evaluated to decide whether to add or remove them. The specific adjustment criteria are not specified by Ming Sheng. In principle, stock selection will be based on factors such as liquidity, company market value, and industry representativeness. Among them, liquidity is the most concerned indicator of MSCI.

Basically, in addition to the official routine adjustments, the selection of A-share constituents also faces its own particularities. One is that in addition to the general principles of MSCI, A-share entry is based on the Mainland Stock Connect mechanism, that is,The MSCI constituent stocks must meet the requirements of the mainland stock market. The second is that there is a 30% foreign shareholding limit on A shares. Similar to Han’s laser approaching the shareholding ratio, all stocks have been removed by MSCI due to the closing of the buying channel; etc.There are some problems such as suspension of trading, which will also affect the movement of A-share constituents.

  2. How does the MSCI adjustment affect the relevant constituent stocks?

  From the last three adjustments to see the impact of MSCI component changes.

In order to quantify the impact of changes in the MSCI component, we have selected the last three rounds of MSCI adjustments of related stocks, and calculated the overlapping shareholdings and the changing situation before and after the adjustment.

According to the statistical results, the MSCI composition adjustment does have an impact on foreign holdings: 1. In terms of foreign holdings, by observing the average change in foreign holdings on the 3rd day before and after the announcement date and effective date, you can see more stocksThe foreign exchange holdings increased significantly, and the foreign exchange holdings excluding individual stocks decreased significantly; 2. In the impact range, the announcement date is more significant than the effective date, and the average increase, decrease, and reduction can be obtained 3 days before and after the announcement.Reaching 150,000 to 500,000 shares, and observing the situation of foreign holdings, you can also see that there is a certain lead in the adjustment of foreign holdings of individual stocks. Usually, the corresponding increase and reduction of shares has begun before the announcement and implementation; 3. In terms of impact, the impact of the adjustment of the MSCI component is relatively small. The median increase and decrease of the expansion before and after the adjustment are mostly within 1%, but the performance of the stocks on the eve of the announcement day and the day after the announcement is poor, corresponding to the median decline.The numbers reached 3 respectively.

65% and 1.


  In addition to the usual routine adjustments, there is also a situation in which a buying channel is closed due to foreign shares reaching the ceiling.

For example, in March last year, Han’s Laser, after reaching 28% of the top-level buyers of China Stock Connect, was removed from the list of broken stocks by MSCI. Subsequently, the company suffered an excessively large reduction in shares. After the announcement, 3 days before and after the announcement, the total holdings were reduced by more than 16 million.share.
In terms of key points, Han’s Laser fell nearly 4% on the day of the elimination announcement, and market sentiment was affected by the elimination. However, in the next three trading days, it gradually recovered its lost ground, reflecting the limited impact of the odd stock adjustment on the expected center.

It is worth noting that after July 2019, Han’s Laser continued to be heavily reduced by foreign countries, and it also fell to a low level, but it was more affected by financial thunderstorms and was no longer directly related to the MSCI adjustment.

  In summary, the adjustment of the MSCI composition has indeed affected the relevant stocks, especially in terms of foreign holdings. There will be significant changes in cross-holdings before and after the announcement date and execution date. Among them, there are changes in the holdings around the announcement date compared to the implementation.On the other hand, the dividend behavior of foreign exchange transactions usually has a certain lead; for this, MSCI’s sub-stock adjustment has limited impact on the expected center, but it is still necessary to guard against emotional fluctuations before and after the announcement of individual stocks.

  3. What’s the point of this MSCI quarterly assessment adjustment?

  On the early morning of Tuesday (February 13), Ming Sheng officially announced the index adjustment results for the first quarter of 2020, and evaluated and adjusted the Chinese companies involved in the MSCI Global Standard Index, MSCI China All-Share Index and MSCI China A-Onshore Index.
The core points of this quarterly evaluation are as follows: 1) Among the constituents of the Global Standard Index, three new A-share targets were added: PICC, Wingtech, and Shanghai Rice; excluding one: Midea Group.

The adjustment of the issued shares is a regular operation of Ming Sheng. After the adjustment, the A-share component of the MSCI Global Index has increased to 474.

Among them, Midea Group’s removal is the same as that of Han’s Laser in March last year, because the proportion of foreign shareholding has recently reached the upper limit of shareholding, and the purchase of land shares is not accepted.

  2) During this quarterly adjustment, the Jinshan office became the first science and technology board target divided into the MSCI index system, which was included in the MSCI China A-Onshore Index and the MSCI China All-Share Index respectively, but was also selected as the MSCI Global Standard Index.

Since its establishment last year, the number and weight of science and technology board companies have continued to rise. It is expected to become one of the main battlefields of A shares in the future, and more targets will be accepted by international indexes.

(For the details of the science and technology board, please refer to Science and Technology Board-Future “Main Battlefield” (20200208)).

  3) In the first quarter of the MSCI assessment, whether the issue of the proportion of A-shares in the market will be cited, it is difficult to have further expansion plans in the first half of the year.

However, from the perspective of history and international experience, MSCI does not completely match the pace of foreign admission at the time, and it will not affect the long-term foreign admission trend.

According to the existing arrangement, the closest expansion will be the FTSE Russell’s March division ratio increase. At that time, the third step of the first stage of A-share division will be implemented, and the A-share decomposition factor will be increased from 15% to 25%.

  Risk Tips 1. Increased volatility in overseas markets; 2. MSCI’s capacity expansion or getting rich has fallen short of expectations.