The quarterly adjustments announced by MSCI have sent ripples through the global financial markets, highlighting the ongoing evolution of emerging market indices.

On the early morning of February 12, 2025, MSCI, a renowned international index provider, released its latest quarterly adjustment results, set to take effect after the close of trading on February 28. This announcement is particularly significant for investors and analysts closely monitoring changes in global market trends and stock performance.

Within these adjustments, the MSCI China Index welcomed eight new stocks from the A-share market, which include names like Hengxuan Technology and Gongxiao Daji, while simultaneously removing twenty stocks such as Anjiel Food and Akeso BiopharmaThis dual action illustrates MSCI's continual reevaluation of potential growth opportunities and market robustness in emerging economies.

Industry experts, reflecting on historical data, suggest that regular index adjustments by MSCI tend to have a limited overall impact on market performanceWhile certain stocks may experience short-term volatility due to the influx or outflow of funds, it is often the overarching economic environment and policy frameworks that dictate market movementThis points towards a more systemic influence rather than a reactionary one purely based on index alterations.

Quarterly Adjustments Unveiled

The February quarterly adjustment results encompass a range of major indices, including the MSCI Global Standard, MSCI Global Small Cap, and MSCI Global Micro Cap indices

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These results are vital for institutional investors and hedge funds that rely heavily on these indices to benchmark their portfolios and make data-driven investment decisions.

The MSCI Global Standard Index will see the addition of 23 new stocks while 107 stocks have been excludedNotably, the top three new entries by market capitalization feature United Airlines Holdings, the social media platform Reddit, and the clinical genetic testing company NateraThese additions not only influence their respective market segments but also reset expectations among investors watching for shifts in performance.

In the MSCI Emerging Markets Index, the three largest newly added stocks are Hyundai Motor India, Emaar Development, and Jitu ExpressEach of these positions represents sectors that have shown resilience and potential amidst global supply chain challenges and shifting consumer preferences.

For investors keen on the A-share market, the suite of MSCI indices includes the MSCI China Index, MSCI China A Onshore Index, and MSCI All China IndexThe focus remains principally on the MSCI China Index, often viewed as a barometer for China’s market strength and investment appeal.

Diving deeper, the MSCI China Index added eight stocks in this latest adjustment cycle, which notably includes Hengxuan Technology, Gongxiao Daji, and Jitu ExpressConversely, it removed stocks such as Anjiel Food and Huaxi Biological, marking a significant reshaping of its portfolioThis dynamic decision-making allows MSCI to attempt to capture the rapid evolution of China’s market landscape.

The MSCI China A Onshore Index, akin to its counterpart, also underwent adjustments by adding firms such as Zhina Compass, Hengxuan Technology, and Jitu Express while removing stocks like Foton Motor and Huada Zhizao

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Such fluctuations underline the necessity for active monitoring and strategic adaptation by investors engaged within this market framework.

It is essential to note that MSCI conducts routine assessments of its indices four times annuallyThe adjustments are based predominantly on objective metrics, including market capitalization and liquidity, which serve as anchors for investment decisions across various sectors.

Impacts on A-Shares

Is the quarterly adjustment by MSCI set to influence the trajectory of the A-share market?

According to Shen Meng, a board director at Xiangsong Capital, the essence of an index is to reflect market conditionsTherefore, aside from potential short-term price fluctuations in constituent stocks, the broader market impact should remain minimalThis perspective emphasizes the transient nature of the adjustments, suggesting that investors should remain aware of the underlying fundamentals guiding the market.

Yuan Huaming, general manager of Huahui Chuangfu Investment, concurs, stressing that typically, newly included stocks attract passive allocation by tracking funds, leading to a likely uptick in their stock pricesConversely, stocks exiting the index might face immediate pressure, which could translate into declinesThese insights reveal the duality of stock movements within the index adjustments.

“Nevertheless, in the long term, the primary drivers of stock prices are the fundamental performance of the companies and their industry prospects,” he noted

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This observation aligns with the growing consensus about the significance of qualitative analysis in stock selection post-adjustments.

Beyond the direct implications for added and removed stocks, Yuan points out that MSCI adjustments may trigger shifts in market sentiments and stylesAdditionally, institutional investors might leverage these adjustments to optimize their investment portfolios, subsequently influencing the market's short-term dynamicsThis complexity calls for investors to be attentive to fund flows and the resultant effect on sector performance.

Bao Jingang, a fund manager and senior researcher at Rongzhi Investment, remarks that historical trends indicate that MSCI's periodic adjustments generally exert limited effects on the overall market landscapeIndividual stocks may indeed see brief fluctuations due to immediate funding movements; however, overarching trends are predominantly swayed by macroeconomic conditions and policy contexts.

Bao further advises that investors should adopt a rational mindset when interpreting MSCI adjustment outcomes, tailoring their investment strategies according to risk tolerance and individual investment goals.

In terms of stock performance, companies such as Jitu Express in Hong Kong and companies like Runhe Software and Sichuan Changhong in A-shares experienced notable surges, with Jitu Express and Runhe Software rising by over 6% and 7%, respectively, while Sichuan Changhong peaked with an 8% gainClosing on February 12, stocks reflected increases of 6.25%, 5.68%, and 6.04%, respectively, indicating a positive reception among investorsThe remaining newly included stocks displayed stable performances overall, maintaining investor interest.

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