On September 25, MSCI, Inc. — a leading global provider of research-based indices and analytics — announced its plans to consult on a further weight increase to China A-shares in the MSCI Global Investable Market Indexes. The changes under consideration include quadrupling the weighting of Chinese A-share large companies in its global benchmarks, adding mid-cap names, and including ChiNext as an eligible stock exchange segment. This consultation follows the successful implementation of an initial 5% inclusion of China A-shares in the MSCI China and related composite indices (such as the MSCI Emerging Markets Index) in May and August 2018.

Let’s unpack the full proposal, piece by piece. The first change would be an increase to the inclusion factor of China A-share large cap securities from 5% to 20% over two phases. Specifically, MSCI would target a 7.5% increase coinciding with their May 2019 semi-annual index review and another 7.5% bump up with their August 2019 quarterly index review. Second, MSCI would increase the list of eligible Chinese stock exchange segments by adding the ChiNext board of the Shenzhen Stock Exchange during the May 2019 review. The ChiNext board, where most technology firms make their debut, represents 20% of the total China A-shares opportunity set and has a larger free-float adjusted market capitalization than Shenzhen main and SME boards. Lastly, China A-share mid cap securities would be included with a 20% inclusion factor as part of the May 2020 semi-annual index review.

MSCI’s rationale for the suggested expansion of A-share inclusion is largely driven by the incremental improvements in market accessibility implemented by China. Since the announcement of MSCI China A shares inclusions in July 2017, the daily trading limit and number of new accounts opened has significantly increased within the Stock Connect program, which is an investment channel between Hong Kong, Shanghai, and Shenzhen that allows international and mainland Chinese investors to trade securities in each other’s markets. There has also been a considerable drop in the number of trading suspensions. For example, the number of large cap trade suspensions in the MSCI China A International IMI Index has decreased from 16 to zero over the past 15 months.

The above chart depicts the pro-forma country weights should these changes be implemented. As indicated, Chinese A-shares’ portion of the index would increase from 0.7% to 3.4%. The anticipated net effect would be a slight increase in China’s overall representation in the MSCI Emerging Markets index by 1.0%.

While MSCI’s consultation may or may not lead to changes in the MSCI indices, this proposal indicates growing confidence in market liberalization within China. And, if implemented, these moves will increase foreign investor inflows into China’s $7 trillion stock market. Chinese markets have been able to handle increased trading volumes. This reaffirms our view that institutional investors will increasingly have exposure to China’s local markets over medium to long term.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Late last week the European Central bank (ECB) announced an end to its quantitative easing (QE) program. Over the last three years the ECB purchased 2.4 trillion euros in bonds to help boost the region’s economy. In October of this year the monthly bond purchases will be halved to 15B euro and move to zero at the end of the year. The ECB balanced this hawkish move with a commitment to keep interest rates at current levels at least through the summer of 2019. In addition, the ECB will continue to reinvest its proceeds from current bond holdings for “an extended period of time.”

The ECB’s actions signal confidence in the economic recovery and provide a timeline for markets to adjust. Despite the end of QE, policies remain accommodative and low borrowing costs should persist into the near future. The central bank remains ready to step in should the region’s economy need further support, but has taken the first steps towards a more normal monetary policy.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

With Italy’s general election set for March 4th, this week’s chart examines the probability of a Euro break-up. This time last year European political risks were at the forefront of investors’ minds. The Netherlands, France, and Germany all held elections in 2017, with investors particularly concerned about France, where the anti-EU Marine Le Pen was polling well headed into elections. Ultimately, each country avoided anti-euro leadership and markets welcomed the results.

Now Italy will hold elections and there are several parties and political factions jockeying for leadership. Based on polling, experts expect no clear winner thus leading to negotiations to form a coalition government. Despite this uncertainty, the Sentix Euro Break-up Index has fallen to an all time low. Over the last two years the European economy has improved dramatically with a falling unemployment rate and rising consumer and business confidence readings. With a rosier outlook on the horizon, the idea of leaving the Euro has become less appealing to citizens. In fact, support for the EU has reached a 10-year high according to the most recent European Commission study. All of this means that an Italy EU exit event, or as we like to call it, Quitaly, is unlikely to occur.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.