China internet:MSCI inclusion

Internet to have same weighting as banks in MSCI China MSCI announced that US-listed Chinese companies will become eligible for inclusion to the MSCI China and MSCI EM indices from Nov 2015. This change is material. Internet’s weighting in the MSCI China is about 10% today. It could double to ~20%after the change, same as Chinese banks.Our indexation team provided 12 internet names for potential inclusion that creates a US$5bn passive demand. Baidu will benefit the most with a 6%weighting in MSCI China, followed by Alibaba, JD.com, and NetEase.

US-listed Chinese companies to be included in the MSCI China

MSCI have announced details of the methodology changes which will allow inclusion of foreign-listed companies. Implementation is set for the Nov 2015 rebalance.

Change to the indices is significant. Internet’s weighting in MSCI China is about 10% today, doubling to 20%+ after the change, same as Chinese banks.

MSCI will release full details of all impacted stocks on Mar-2. Updated methodology book will also be released with the February rebalance. Any changes within this methodology book may impact the outcome of today’s announcement.

Inflow to Baidu, Alibaba & JD.com, but Tencent & Mobile impacted.

Margaret Hartmann, our Head of Indexation and Quant Trading Sales, expects 12 internet and eCommerce companies to be included. Baidu will benefit most with US$2b passive demand. It will represent about 6% of the index after the change.

Other expected inclusion to MSCI China are Alibaba, JD.com, NetEase, Vipshop, Ctrip, Qihoo 360, Youku Tudou, Bitauto, 58.com, Autohome, and SouFun.

Sina and Jumei were highlighted in the original consultation, but they might miss out if their performances do not improve by the next index review.

qTencent and China Mobile will be negatively affected, but our BUYs are maintained.

Positive for market sentiment

This will be the biggest change to the index since its move to free-float. Liquidity impact is large. According to Bloomberg, active funds primary benchmarking MSCI China has total AUM of US$187bn+, plus billions benchmarking AxJ & EM indices.

S&P Dow Jones has already included US-listed Chinese stocks in the global indices.FTSE is studying potential inclusion. FTSE China ETFs has about US$24bn in AUM.

Francis Cheung, our Head of China/HK Strategy, expects a positive boost to market sentiment. The improved benchmark might boost ETF demand, benefiting from inclusion higher quality companies with stronger and more visible growth.

Our fundamental picks are Baidu, Alibaba and JD.com

We had outlined our 2015 stock picks in our report last week. Our top picks are Baidu, Alibaba and JD.com, consistent with top-3 beneficiary of passive inflows.

Beta plays are mid-caps and small-caps. Among them, we have BUYs on Vipshop, Qihoo 360, Soufun and Leju.