Hong Kong Exchanges and Clearing MSCI China A50 Interconnection Index Futures contract was officially traded on October 18, 2011. it is the second overseas stock index futures linked to A shares after the FTSE China A50 index futures contract.

On the same day, the first batch of MSCI China A50 interconnection ETF was approved, namely Yi Fangda (raising 8 billion yuan), Huidianfu (8 billion yuan), Huaxia Fund (6.8 billion) and Southern Fund (3.9 billion yuan). What are the characteristics of MSCI China A50 Interconnection Index? What is the significance of the HKEx launching the futures contract? This article will analyze this topic.

1.Hong Kong Stock Market Strategy: MSCI A50 Index helps the internationalization of China's Stock Market

Review: Hong Kong stocks rebounded in October but pulled back at the end of the month.

Most of the indexes in the global market were positive in October, with the NASDAQ and the S & P 500 rising, while the Kospi and Nikkei 225 fell slightly.

The hang Seng index stabilized and rebounded in October but pulled back at the end of the month, with a cumulative rise and fall / maximum rise and fall of 3.3% and 6.8% for the month. Compared with other markets, the CSI 300 index rose or fell / the largest index rose or fell by 0.9%, 2.8%, 3.3%, 3.3%, 7.3%, 7.3%, 6.7%, 7.0%,-1.9%, 2.1% and 3.4%, respectively, for the CSI 300 index, the gem index, the Nasdaq index, the S & P 500, the Nikkei 225, the FTSE 100 and the German DAX.

Judging from the market trend, the Hang Seng Index stabilized and rebounded at the beginning of October, rebounded after reaching the month's low of 23966.5 on October 6, and pulled back after reaching the month's high of 26136.0 on October 20.

In terms of industry performance, the Hong Kong stock industry was mixed in October, with the health care industry (- 8.2%), energy industry (- 3.6%) and real estate construction industry (- 2.1%) having the largest decline, while the information technology industry (7.1%), non-essential consumer industry (6.7%) and essential consumer industry (2.4%) showed the largest increase.

The inflow of southward capital in October was HK $9.78 billion, and the cumulative net inflow of southbound capital reached HK $2.13969 trillion as of 2021-10-31. In October, southward capital accounted for 10.6% of Hong Kong stock turnover, the same as in September this year.

MSCI China A50 interconnection index selects leading companies, the industry distribution is more balanced, and the participants of futures index transactions are more abundant.

From the point of view of the compilation method, the MSCI China A50 interconnection index selects the leading companies in various industries, which is highly representative. The specific sampling method includes two steps:

Step 1: based on the corresponding weight of individual stocks in the parent index, select the two largest stocks from each of the 11 GICS (Global Industry Classification Standard) sectors.

Step 2: the remaining 28 stocks are selected from the parent index by index weight until the total number reaches 50. At the same time, MSCI selects 15 stocks to form a buffer pool, which aims to reduce the turnover rate of the index and enhance stability.

From the point of view of the industry distribution of index components, compared with the FTSE China A50 index and the CSI 300 index, the industry distribution of MSCI China A50 interconnection index is more balanced, and the proportion of finance and consumption is lower.

As of July 2021, the four industries with the highest weight in the MSCI China A50 interconnection index were finance, industry, essential consumer goods and information technology, accounting for 18.2%, 17.5%, 15.9% and 13.4%, respectively, accounting for 65.0%. While the FTSE China A50 Index with 50 constituent stocks accounts for a high proportion of finance and consumption, the four industries with the highest weights account for 82.5%, and the industry concentration is relatively high; the four industries with the highest weight in the CSI 300 Index account for 66.3%, although the concentration has decreased, but it is still higher than the MSCI China A50 Interconnection Index.

In addition, equivalent to the stock index futures contract in the domestic market, the MSCI China A50 Interconnection Index Futures contract (hereinafter referred to as the MCA contract) launched by the Hong Kong Stock Exchange is suitable for different types of investors, including domestic and foreign fund managers focused on investing A shares, investors for arbitrage purposes, investors for hedging purposes, high net worth investors and so on.

The launch of MSCI China A50 Interconnection Index Futures by HKEx will help speed up the internationalization of A shares.

With the continuous expansion of A-share opening to the outside world, the position of foreign capital in A-share market is on the rise. Under the caliber of the people's Bank of China, the amount of Chinese equity assets held by foreign investors has increased from 340 billion yuan in 2013 to 3.76 trillion yuan in 21H1, accounting for 9.91% of the free market capitalization of A-shares from 3.77% in 2013 to 9.91% of 21H1.

Under the Shanghai and Shenzhen Stock Connect, as of 2021-10-31, the cumulative inflow of northward capital into A-shares increased from 40.6 billion yuan in 2014 to 1.53 trillion yuan in 2021, accounting for 0.30% of the current market value of A-shares, up from 0.30% in 2014 to 3.92% in 2021.

As more and more foreign investors invest in Chinese A-shares through different channels, in order to meet the growing demand of foreign investors for risk management tools, a sound offshore A-share derivatives trading and hedging mechanism is becoming more and more important.

Before the launch of the MCA contract, the FTSE China A50 Index Futures contract (hereinafter referred to as the CN contract) has always been the only A-share futures contract for foreign investors to invest directly overseas. However, as mentioned above, the proportion of finance and consumption in the FTSE China A50 index is too high, which is different from the actual foreign shareholding structure.

Take northbound capital as an example, as of 2021-10-31, the four industries with the largest market capitalization of northbound capital holdings were daily consumption, finance, information technology and industry, accounting for 22.1%, 16.7%, 13.3% and 12.8%, respectively, accounting for 64.9%. Because the target of the CN contract can not well match the position characteristics of northbound funds, so the risk can not be hedged to the maximum extent.

In addition, although there are Shanghai 50 index futures contracts and CSI 300 index futures contracts in the domestic market, foreign investors' participation in onshore products faces restrictions in many aspects, such as access qualifications, trading threshold, trading volume and transaction costs. On the other hand, the distribution of the underlying industry of the MCA contract is more balanced, has a higher correlation with the existing market benchmarks (such as Shanghai 50 and CSI 300 index), has a better representation of the A-share market, and can participate in more diverse subjects.

Therefore, after the launch of the MCA contract, the market indicators that domestic and foreign investors can refer to are expected to be further expanded, and the risk management tools of foreign investors will also be enriched, which will further enhance the attractiveness of A-share assets in the global portfolio.

Finally, the launch of the MCA contract helps to support the MSCI index to improve the inclusion factor of A-shares, thereby attracting more global capital allocation of A-shares. MSCI announced on 2019-2-28 that it would increase the inclusion factor of Chinese A-shares from 5% to 20%, which has been maintained until now. Before considering the further inclusion of A shares, MSCI needs to address a number of concerns raised by investors, including the feasibility of risk hedging and the supply of derivatives, the short settlement cycle of Chinese A shares, the trading holiday arrangement of the Shanghai-Shenzhen-Hong Kong Stock Connect, whether a comprehensive trading mechanism will be provided in the Shanghai-Shenzhen-Hong Kong Stock Connect, and so on. The launch of the MCA contract may meet one of the four prerequisites needed by MSCI to further improve the inclusion factor of Chinese A-shares.

Looking to the future, if the weight of Chinese A-shares in the MSCI index increases, the scale of foreign investment in A-shares will also increase significantly. As of 2021-8-31, the MSCI index included 474 Chinese A-shares, accounting for 0.6 per cent of the MSCI global index and 4.7 per cent of the MSCI emerging markets index, according to MSCI cited by Hong Kong Exchanges and Clearing. On a pro forma basis, A shares are likely to account for 44.4 per cent, 22.1 per cent, 19.7 per cent and 2.7 per cent of the MSCI China Index, MSCI Asia excluding Japan Index, MSCI emerging Markets Index and MSCI Global Index, respectively.

MSCIThe launch of China A50 Interconnection Index Futures will help consolidate Hong Kong's position as a global offshore RMB center.

From the perspective of futures index products themselves, the launch of MCA futures contracts can expand the offshore RMB capital pool in Hong Kong, China, and enrich offshore RMB investment products; at the same time, it can provide a "one-stop" investment platform for institutions holding offshore RMB funds, and foreign investment institutions can centralize trading, clearing and settlement on one platform, thereby reducing operating costs, improving capital utilization efficiency, and better risk management.

From the perspective of interconnection, the launch of MCA futures contract is another important measure for Hong Kong, China to further integrate into the overall situation of national development and the interconnection of the capital markets of the two places. According to the Baijia account of Xinhua News Agency, the outline of the 14th five-year Plan in March 2021 states that it is necessary to support Hong Kong, China in upgrading its status as an international financial, shipping, trade center and international aviation hub, and strengthen the functions of the global offshore RMB business hub, international asset management center and risk management center.

Since the opening of Hong Kong stocks, southbound capital has been playing a more and more important role in the Hong Kong stock market. the cumulative inflow has increased from 4.6 billion yuan in 2014 to 2.1 trillion yuan in 2021-10-31, accounting for 8.3 percent of the total market capitalization of Hong Kong stocks from 0.04 percent. In 2021-9-24, the bond link "Nanxiangtong" was officially launched, opening the door for southward funds to invest in the bond market in Hong Kong, China. Following the MCA index contract, Hong Kong, China is expected to continue to introduce more measures to promote the interconnection of the capital markets of the two places in the future.

According to Phoenix New Media, Carrie Lam, Chief Executive of the Hong Kong Special Administrative region of China, said in his policy address on 2021-10-6 that the two-way flow of cross-border RMB funds and the development of offshore RMB products and tools would be further expanded. these include studying specific measures such as increasing the demand for issuing and trading RMB securities and allowing southbound stocks traded by Hong Kong Stock Connect to be denominated in RMB.

Pay attention to the main opportunities of technology and consumption in Hong Kong stocks, and the investment value of low valuation and high dividend sectors.

Hong Kong stocks stabilized and rebounded in October but fell back at the end of the month. As of 2021-10-31, the Hang Seng Index PE and PB were 11 times and 1.1 times, respectively, at 57.1% and 25.9% since 2008-10-27 (the low after the 2008 financial crisis, the same below), while the S & P's 500PE and PB were 26.2 times and 4.7 times, respectively, at 88.7% and 100.0% since 2009-3-6. The A-share Shanghai and Shenzhen 300s PE is 13.2x and PB is 1.6x, ranking in the bottom-up 54.6 per cent and 45.6 per cent quantiles since 2008-11-4. The AH premium index currently stands at 144.33, the bottom-up 96.3 per cent since 2008-9-16.

At present, the long-term investment value of Hong Kong stocks is prominent. We think that we can pay attention to two types of opportunities:

(1) the main opportunities for technology and consumption.Referring to the experience of developed countries such as the United States and Japan, the future science and technology plus consumption is the direction of China's transformation, and the fundamentals of science and technology and consumption are relatively stronger. Specifically, Hong Kong stocks have domestic consumer head companies such as sportswear, which are expected to benefit from the rise of the national tide and the domestic "double cycle" trend. For Hong Kong Internet companies, we need to continuously track the impact of regulatory policies on fundamentals, and we cannot rule out the possibility of Internet companies stabilizing and rebounding in the short term, but in the medium to long term, we need to pay attention to whether the policies will affect the business model of the Internet. If the antitrust policy is only to standardize the industry order, it will not change the medium-and long-term trend of the Internet industry. If the antitrust policy damages the core competitiveness, it may reduce its long-term investment value.

(2) the investment value of high dividend assets.For long-term funds, financial, real estate and other high dividend assets have a thick safety cushion. At the same time, among the companies listed at the same time, Hong Kong stock finance, real estate and other value sectors have a larger discount relative to A shares, so the performance-to-price ratio of investment is higher.