China Index-Trackers to Double Down on Alibaba as Stocks Slide

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  • ADR members have outperformed MSCI China since their inclusion
  • Addition to MSCI to broaden investor base: Enhanced Investment

Global investors are about to get a double dose of Chinese equities that have provided a haven, of sorts, from the nation’s stock slump.

Alibaba Group Holding Ltd. and 12 other American Depository Receipts will have their full value included in MSCI Inc.’s indexes from the close on Tuesday, six months after half their free float-adjusted market capitalization was added to the gauges. The shares are down 5.6 percent on average from then through last week, beating the MSCI China Index’s 8.1 percent drop. Losses have been even worse on the mainland, with the Shanghai Composite Index tumbling 18 percent for the world’s second-steepest decline.

The index changes will give passive investors bigger stakes in China’s technology and services while downsizing state-run industrial and financial giants, mirroring what policy makers are seeking to do for the economy. MSCI will decide next month whether to include mainland-traded A shares as well. Tobias Bland, chief executive of Enhanced Investment Products, a manager of exchange-traded funds, says Tuesday’s change will put ADRs in the hands of a broader group of investors who’ll be willing to pay higher valuations for the shares.

“U.S. investors are giving them a low valuation because of the China risk,” said Bland. “China risk to them is probably a lot greater than to people in Hong Kong or Singapore. Now with the MSCI inclusion, hopefully a lot more global investors will be able to buy them as part of their mandate.”

BlackRock Inc., which manages the biggest ETF tracking the MSCI Emerging Markets Index, increased its holding of shares in U.S.-traded Chinese firms by 500 percent following MSCI’s inclusion of the ADRs in November. Chinese companies were the main beneficiaries of the index compiler’s revised approach, which broadened national benchmark measures to include companies that had a primary listing outside their home markets.

The MSCI China Index rose 0.9 percent on Tuesday to close at a four-week high in Hong Kong. Tencent Holdings Ltd., which has the highest weighting on the gauge, climbed 2 percent to a record high.

‘Positive Catalyst’

Shares of the biggest ADRs have risen as the date of their increased MSCI China weighting approaches. Alibaba surged 3.3 percent on Friday, paring its loss for 2016 to less than 1 percent and almost erasing a decline after the e-commerce giant disclosed a regulatory probe. The company currently makes up 4.4 percent of the gauge. Baidu Inc. rallied 8.8 percent last week to narrow this year’s decline to 2.1 percent.

Active investors may be buying in anticipation of gains spurred by the changes to the MSCI indexes, according to Chi Tsang, the Hong Kong-based head of Asia Internet research at HSBC Holdings Plc.

“There is a mismatch between the ADRs’ prices and their fundamentals,” said Tsang. “The inclusion is a positive catalyst.”