Chinese technology stocks such as Alibaba, Baidu and others are expecting a boost after index compiler MSCI allowed US-listed equities to join key indices.
Alibaba, whose initial public offering (IPO) on the New York Stock Exchange last year was the largest IPO to date, is the largest (by market capitalisation) of several stocks to join MSCI's Emerging Markets index, the MSCI China index and other indices covering China.
Previously, MSCI excluded from its country indices companies that traded in a different time zone. The rule change means more than a dozen US-listed Chinese firms will join MSCI's indices, giving investors more exposure to the so-called "new Chinese economy" including technology firms.
Jing Ning, a portfolio manager at Fidelity International, says US-listed Chinese stocks will ultimately make up about 15% of the MSCI China index. The change will tilt the balance towards private rather than state-owned companies in the index and may attract more foreign institutional investors to allocate money to the index holdings.
"Also, if US-listed companies are favoured by investors we may see state-owned enterprises adopt a more shareholder friendly approach as a way of capturing foreign investment," says Ning. "This is a development we are ready for."
Raymond Ma, another portfolio manager at Fidelity, says US-listed Chinese stocks have already risen in price in anticipation of the index change by MSCI. He says the inclusion of the US-listed stocks may cause Chinese banking stocks to underperform as investors rebalance their Chinese portfolios away from this sector.
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