(Bloomberg) — MSCI Inc., the world’s biggest index provider, shook off concerns about the “investability” of Chinese stocks following Beijing’s recent regulatory crackdown, citing previous instances where markets rebounded in the aftermath.
Regulatory compliance has weighed on China “every three, four, five years and obviously the markets have sold off at the time. But very quickly afterwards, the markets have recovered and gone through to new heights,” MSCI Inc. Chairman and Chief Executive Officer Henry Fernandez told Bloomberg Television’s Haidi Lun and Shery Ahn in an interview.
MSCI’s optimism on China stands in contrast to some investors who have called the nation’s stock market “uninvestable.” Regulatory uncertainty wiped off about $1 trillion from the market value of local stocks listed globally last month, with sharp declines in sectors including online gaming, live streaming and liquor.
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Every emerging market in the world has faced such criticism, Fernandez said, adding there were times markets in India and Mexico were also deemed uninvestable because of actions by their governments.
“We have to look at this process that the Chinese regulators are going through in the prism of the last 10 years and also across other markets in the world,” he said.
Stock benchmarks in Hong Kong and on the mainland are among the world’s worst-performing major equity gauges this year, at a time when U.S. benchmarks have been setting record highs. The Hang Seng Index dropped into a bear market last week.
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China’s regulatory campaign has come after a decade-plus boom in index investing that’s led to billions of dollars tracking Chinese stocks in gauges such as the MSCI Emerging Market Index and the MSCI Asia Pacific Index.
MSCI, as well as rivals FTSE Russell and S&P Dow Jones Indices LLC, have boosted their offerings of Chinese stocks over the years due to client demand for exposure to world’s second-biggest economy.
So far there’s little sign that index providers are reversing course, with MSCI launching a futures contract based on the MSCI China A 50 Connect Index with Hong Kong’s bourse next month.
“There is a lot of criticism on China in terms of lack of compliance” and the country is now going through a corrective phase, Fernandez said. “Countries go through periods like this.”
Gabriela Santos, a global market strategist at JPMorgan Chase’s asset management unit, also disagrees with the view that China is now uninvestable.
“We had this in 2018, 2015 and 2011 and it’s unrelated to the economic cycle — it’s related to China’s regulatory and reform campaigns,” she said in an interview with Bloomberg Television on Saturday. “It takes time to rebuild confidence, but three months out Chinese equities tend to trend up.”
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(Updates to add comments of JPMorgan strategist in last two paragraphs.)
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