Hong Kong Stock Concept Tracking | MSCI China Index Quarterly Adjustment Takes Effect After Market Today! Institutions suggest paying attention to the potential impact on stocks with poor liquidity (including concept stocks)

According to the financial news app Zhitong Finance, on May 15th, the international index compiler MSCI announced the results of its quarterly index adjustment for May 2024, which will take effect after the market closes on May 31st, 2024. In this adjustment, MSCI China Index added 10 new constituent stocks, including Hisense H.A. (00921) and MMG (01208) for Hong Kong stocks, and Wanfeng Aowei (002085.SZ) and 8 others for A shares. At the same time, 56 constituent stocks, including Binjiang Group (002244.SZ), were removed.

Data shows that MSCI indexes are the most widely used benchmark indexes by global portfolio managers. MSCI conducts four routine adjustments to all its indexes every year, including significant semi-annual reviews in May and November, as well as smaller quarterly reviews in February and August. The basis for each adjustment mainly includes indicators such as market capitalization and liquidity.

Specifically, the MSCI China Index added a total of 10 new constituent stocks this time, including two Hong Kong stocks, Hisense H.A. and MMG, as well as 8 A shares including CITIC Special Steel, Hisense H.A. A, Wanfeng Aowei, Jinchengxin, Pingmei Coal, Nangang Steel, Tiandi Technology, and CNOOC Development.

In addition, the MSCI China Index removed 56 constituent stocks, including 15 Hong Kong stocks such as JianTao Group, China XD, Sany International, Air China, China Overseas Property, Dongfeng Group, and China Merchants Port Holdings. Also, 41 A shares including Mingyang Intelligent, Binjiang Group, New City Holdings, Jiejia Weichuang, Junshi Biosciences-U, Yonghui Superstores, Jianyou Shares, China Overseas Land & Investment, Bairun Shares, Greenland Holdings, Yirui Technology, Hemai Shares, and Xinyuan Shares were removed.

Analysts from CICC previously analyzed that from a historical perspective, the impact of routine index adjustments on the overall market is controllable. By calculating the performance of the Chinese market (A shares and Hong Kong stocks) one day, three days, and one week after 17 MSCI index regular adjustments since 2020, there is no definitive pattern of rise or fall. This also indicates that the direct impact of index adjustments is more reflected at the individual stock level.

Regarding fund flows, CICC pointed out that based on historical experience of index adjustments, passive funds usually adjust their positions on the last day, which is May 31st, in order to minimize tracking errors. Therefore, significant changes in trading volume of stocks with large weight adjustments are often seen as "abnormal", especially in the closing auction. In contrast, active funds do not have this constraint and can choose the timing of their allocations. The bank suggests paying attention to the potential impact on stocks with poor liquidity.

In terms of stock price impact, after the results are announced but before the official implementation date, some arbitrage funds will adjust their positions based on the official results, especially for unexpected outcomes that were not fully predicted by the market. However, it is important to note that although passive funds "must" adjust their positions according to the weight changes on the official implementation date, the actual stock price changes during this period may not necessarily align with the direction of the weight adjustments. Instead, they are more influenced by the comparison of strength between arbitrage funds and passive funds, and there have been cases where newly added or stocks with increased weights have seen a decline in stock prices on the implementation date of the adjustmentIt is worth noting that, since the beginning of this year, with the continuous improvement of the prospects for China's economic recovery, the optimism towards "investing in the Chinese market" has been increasing, and foreign institutions have been bullish on Chinese assets.

In late April, the Chief Strategist for Global Emerging Market Stocks at UBS published views on emerging market stock strategies, raising the rating of the MSCI China Index to overweight, mainly due to the better earnings per share (EPS) performance of the MSCI China Index.

In addition, Goldman Sachs research department recently maintained a high overweight rating for A-shares in China, with an expected return of 10% for the MSCI China Index and the CSI 300 Index in 2024, and an estimated corporate profit growth rate of 8% to 10%.

In May, the MSCI China Index included Hong Kong stocks:

Hisense H.A. (00921): Up 90% since February. Goldman Sachs stated that they maintain a "buy" rating for Hisense H.A., considering more positive growth and profit prospects, especially in the traditional white goods business under clear strategic support. The company's earnings per share forecast for 2024 to 2026 has been raised by 0% to 3%, with the target price raised from HKD 31 to HKD 35.

MMG (01208): Up 95% since February. Huafu Securities pointed out that in the short term, the delay in high copper prices is due to postponed demand, but supply contraction can be expected, driving copper prices up with reduced inventory pressure. In the medium term, the strong demand for new energy will widen the supply-demand gap, and the current copper price may only be a new starting point in the long term.

Some Hong Kong stocks excluded:

Kingboard Holdings (00148): Up 39% since February. Affected by the significant increase in copper prices and with more customer stockpiling, the company has increased material prices by HKD 5 per sheet to HKD 10 per sheet, with a price increase range of 5% to 10%. In March this year, the company had already raised prices by HKD 10 per sheet for all products, marking the second price increase this year. Some institutions believe that the price increase by major copper clad laminate manufacturers may release the performance elasticity of related companies.

Sany Heavy Industry (00631): Up 23% since February. The company's first-quarter comprehensive revenue was approximately RMB 5.13 billion, a year-on-year decrease of about 5.7%; gross profit was approximately RMB 1.2775 billion, a year-on-year decrease of about 4.0%; net profit attributable to shareholders of the parent company was approximately RMB 516 million, a year-on-year decrease of about 20.7%. Industrial Securities stated that Sany Heavy Industry's first-quarter performance declined, mainly due to a significant decrease in revenue from mining equipment. It is expected that the company's mining equipment will achieve slight growth by 2024