E-Fonda Hong Kong: Including the “core assets” of A-shares, the MSCI China A50 Connectivity Index highlights medium- to long-term investment value

In November 2021, the first batch of MSCI China A50 interconnected ETFs in mainland China was listed on the same day. In mid-December 2021, three Hong Kong asset management companies, including E-Fonda Hong Kong, launched similar products on the Hong Kong Stock Exchange. The MSCI China A50 Connectivity Index brings together leading companies in all major A-share industries and is one of the best carriers for medium- to long-term investment in the Chinese stock market.

Stronger profitability and growth

The compilation of the MSCI China A50 Connectivity Index generally adopted the idea of industry neutrality and dynamic balance. The MSCI China A50 Connectivity Index has the following significant characteristics that distinguish it from other A-share broad-based indices: First, its long-term historical performance is superior to other A-share broad-based indices. Judging from historical performance, the MSCI China A50 Connectivity Index has a profit of up to 160% * from the base date (2012/11/30) to December 31, 2021.

Second, because it uses a weighting method that is neutral and dynamic in the industry, the industry structure presented by the index is more balanced than the traditional broad-based index. The new economy sector, which mainly focuses on information technology, optional consumption, and healthcare, accounts for more than 50% of the weight of the index, which can better reflect the position of the new economy sector and emerging industries in China's economic structure.

Analyze the advantages of the MSCI A50 index through DuPont analysis

Starting from the classic performance evaluation method, DuPont analysis, we further explore the financial secrets behind industry leaders. As a classic performance evaluation method, DuPont analysis further decomposes ROE into three factors, links the three dimensions of profitability, operating capacity, and capital structure, and fully and clearly reflects the relationship between the company's profit margin, operating efficiency, and leverage ratio.

The study found that the important source of the difference between ROE and Wandequan A at the MSCI China A50 connectivity index level is the net sales profit margin. The stronger the position of the industry and the higher the profitability of the index, the higher the profitability, it will bring excellent net sales interest rate performance to a certain extent, thus leading to excellent ROE performance. The overall net sales interest rate index of the MSCI China A50 Connectivity Index is on an upward trend. In 2020, it was 4.3% higher than Wande's A Index.The net sales interest rate of the MSCI China A50 Connectivity Index rose 1.7% during the period 2012-2020 and 3.8% under the median method, reflecting a trend of long-term improvement in the profitability of the index components, or the continuous increase in bargaining power due to the dominant position in the leading industry chain. Moreover, the improvement trend under the median method is more obvious, which means that companies with relatively low profitability in the composition have continued to strengthen their position in the industry during this period. In contrast, the net sales interest rate of the Wande Quan A Index fell by 0.4% during the calculation period. The increase was less than that of the MSCI China A50 Connectivity Index, and the absolute level was also 4.1% lower.

Note: China A50 refers to MSCI China A50connectivity index,Data source: Wind.

Easy allocation of A-share core leaders

China's economic growth potential remains enormous, and as the country pushes ahead with strategic new industrial development, technological autonomy and changes in business models, the future economic growth momentum will shift to a new, technologically advanced economic sector. This long-term period of high-quality development spanning generations in China is to be expected over the next 30 years. Investing in China A stocks is an indispensable option for future global equity asset allocation, and following the MSCI China A50 Intermediary Index is the most convenient way for global investors to invest in China A stocks and embrace China's opportunities.

It is the general trend for MSCI to continue to gradually increase the inclusion ratio of A-shares in the future. The launch of the Hong Kong Stock Exchange MSCI China A50 Connectivity Index futures will help accelerate the process of increasing the inclusion ratio of A-shares in mainstream international index systems such as MSCI. Currently, the allocation ratio of overseas capital portfolios to A-shares is still low compared to China's economic size in the global position. As the weight of A-shares in major indices such as MSCI increases, the long-term trend of increasing allocation of foreign capital to A-shares is highly certain, and will become one of the most important sources of incremental capital. The inflow of capital from abroad will promote a steady increase in the level of institutionalization in the A-share market. In the future, the investor structure will become more mature, and the overall market volatility is expected to decline.

*Note: The MSCI China A50 Connectivity Index was launched on August 20, 2021. The data prior to launch was backtesting data (that is, an estimate of the index's performance over that time period assuming the index exists). There is often a substantial difference between backtest performance results and actual results. Past performance (whether actual performance or backtest performance) does not represent or guarantee future performance.

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