E Fund Hong Kong: Capturing A-share 'core assets,' the MSCI China A50 Connect Index highlights medium- to long-term investment value

In November 2021, mainland China’s first batch of MSCI China A50 Connect ETFs were listed on the same day. In mid-December 2021, three Hong Kong asset managers, including E Fund Hong Kong, launched similar products on the Hong Kong Exchange. The MSCI China A50 Connect Index brings together industry leaders across all major A-share sectors and is one of the best vehicles for medium- to long-term investment in China’s equity market.

Stronger profitability and growth potential

The MSCI China A50 Connect Index is generally constructed based on an industry-neutral and dynamically balanced approach. The index has several distinguishing features compared to other broad-based A-share indices: First, its long-term historical performance has outperformed other large-cap A-share benchmarks. From its base date (November 30, 2012) to December 31, 2021, the index delivered a cumulative return of 160%*.

Second, due to its industry-neutral, dynamically weighted methodology, the index exhibits a more balanced sector composition compared to traditional broad-based indices. New economy sectors—primarily Information Technology, Consumer Discretionary, and Health Care—account for over 50% of the index weight, better reflecting the growing role of new economy and emerging industries in China’s economic structure.

Analyzing the Advantages of the MSCI A50 Index Through DuPont Analysis

Starting from the classic performance evaluation framework—the DuPont analysis—we further explore the financial fundamentals behind industry leaders. As a well-established method for performance assessment, DuPont analysis decomposes Return on Equity (ROE) into three key drivers, integrating profitability, operational efficiency, and capital structure to clearly and comprehensively illustrate the interplay among a company’s net profit margin, asset turnover, and financial leverage.

Research shows that the key difference in ROE between the MSCI China A50 Connect Index and the Wind All-Shares Index stems primarily from net profit margin. The stronger the industry leadership and profitability of the index constituents, the higher their net profit margins tend to be, which in turn drives superior ROE performance. The net profit margin of the MSCI China A50 Connect Index has shown a general upward trend, exceeding that of the Wind All-Shares Index by 4.3% in 2020.Between 2012 and 2020, the net profit margin of the MSCI China A50 Connect Index increased by 1.7%, and by 3.8% when measured using the median method, reflecting a sustained improvement in the profitability of its constituents—potentially driven by the growing pricing power stemming from their dominant positions in supply chains. The improvement is even more pronounced under the median approach, suggesting that companies with relatively weaker profitability within the index have strengthened their industry standing during this period. In contrast, the net profit margin of the Wind All-Shares Index declined by 0.4% over the same period, showing less growth and remaining 4.1% lower in absolute terms than that of the MSCI China A50 Connect Index.

Note: 'China A50' refers to the MSCI China A50.Connect Index,Source: Wind.

Effortlessly allocate to core A-share leaders

China's economic growth potential remains substantial. As the country vigorously promotes the development of strategic emerging industries and encourages technological self-reliance and business model innovation, the engine of future economic growth will shift toward new economy sectors driven by technological advancement. The next three decades—a generational, high-quality development phase—holds significant promise. Investing in China A-shares is an essential component of global equity asset allocation, and tracking the MSCI China A50 Connect Index offers global investors the most convenient way to access China’s A-share market and capture China’s growth opportunities.

It is widely expected that MSCI will continue its phased increases in the inclusion factor for A-shares. The launch of the MSCI China A50 Connect Index futures by Hong Kong Exchange will help accelerate the process of raising A-share weightings in major international index families like MSCI. Currently, overseas investors’ allocation to A-shares remains disproportionately low relative to China’s share of the global economy. As A-shares gain greater weight in key indices such as MSCI, foreign capital is highly likely to steadily increase its long-term allocation to A-shares, becoming one of the most important sources of incremental funding. Inflows of offshore capital will further enhance the institutionalization of the A-share market, leading to a more mature investor base and potentially lower overall market volatility in the future.

*Note: The MSCI China A50 Connect Index was launched on August 20, 2021. Data prior to the launch date are back-tested (i.e., hypothetical index performance assuming the index had existed during that period). Back-tested results often differ substantially from actual performance. Past performance—whether actual or back-tested—does not represent or guarantee future results.

(Edited by Eric Zheng)

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