MSCI, a leading global equity index provider, is expected to announce today whether it will change current policy and add China’s locally traded A shares to its popular benchmarks, most notably the MSCI China Index the MSCI Emerging Markets Index. MSCI has previously deemed China’s A shares ineligible for inclusion due to government-imposed limitations on their tradability. If added, the process will likely be gradual with the initial stage expected to be only 5% of more than 200 eligible A shares to the emerging-market index, accounting for less than 1% of the benchmark. This potential MSCI move follows last month’s launch by FTSE Group, a competitor in the benchmark space, of two emerging-market indexes that include A shares. Vanguard Group then followed by announcing it will add mainland shares to its $69 billion emerging-market index funds.
The MSCI China A Index captures large and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges. MSCI Emerging Markets is an index designed to measure equity market performance in global emerging markets. The Emerging Markets Index is a float-adjusted market capitalization index. The performance of an index does not reflect any fees and charges associated with individual investments or investment advisory accounts. It is not possible to invest directly in an index.
The spectacular rise in China’s equity market has been a major story in international markets over the past 12 months. Along with evidence of excessive speculation that includes a troubling jump in the number of new trading accounts opened and the total amount of margin debt, there has been growing speculation that the Chinese government has played a role in encouraging the market boom. This article details some of the reasons why the Chinese authorities may be encouraging the rise in stocks, including the potential for heavily-indebted state-owned firms to swap debt for equity and to provide an offset to a stagnating real estate market. Recent government attempts to rein in the growth in margin trading has thus far, not had much impact on speculative activity and the potential major correction in China’s frothy equity market is a risk in the second half of 2015. ”
The Federal Reserve is expected to raise interest rates by year end and the shift in monetary policy will not unsettle markets according to the Wall Street Journal Real Time Economics blog. The pace of monetary tightening is expected to be slow enough to not rattle markets. The Federal Reserve is unlikely to implement an aggressive monetary tightening policy with a backdrop of mild economic growth, low inflation, and a soaring dollar. In Frederic Neumann’s view, a bigger threat to global markets is an unexpected shift in monetary policy from either Japan or Europe. Neumann feels that is unlikely, but any mention of taper from the European Central Bank or Bank of Japan in the near term would shock global markets.
Saudi Oil Minister Ali al-Naimi said its oil market strategy of refusing to reduce oil output is working. The comments came days before OPEC’s June 5 meeting and suggest that Saudi Arabia is determined to stick to its aim of driving out higher-cost production to maintain and grow its market share. This should keep oil markets well supplied in the near term as Saudi Arabia continues to produce over 10 million barrels per day, its highest level of production in over 40 years. Eventually, supply and demand forces will cause prices to stabilize as demand rebounds and higher-cost supply is reduced. Global oil consumption will rise by 1.1 million barrels a day this year, to average 93.6 million a day compared to an increase of only 700,000 barrels per day in 2014, according to the International Energy Agency (IEA).
With the S&P trading near all-time highs, many articles have focused on stock market valuation metrics being at levels above historic norms. The following piece takes a slightly different angle by examining corporate earnings rather than PE multiples. Over the last ten years, S&P 500 returns have easily exceeded gains in both corporate earnings and sales. If earnings margins decline from today’s lofty levels, top-line revenue will have to pick up the slack in order to maintain overall bottom-line earnings. Q1 2015 sales per share for the S&P 500 are on pace to come in $25 less than the prior quarter, despite a 45 bps increase in quarterly operating margins. Health Care and Financials are the two sectors responsible for the overall recent margin expansion.