HONG KONG -- Mainland Chinese shares fell on Friday, as individual investors, a key market segment, showed little desire to chase the 226 large-cap names that joined one of the world's most closely followed baskets of stocks.
The Shanghai Composite Index fell 0.66% and Shenzhen's SZSE Component Index slid 1.23%, failing to see an influx of international funds on the first day since mainland A-shares were added to MSCI indexes. Investors reacted more strongly to news of the U.S. imposing metals tariffs on allies.
Stocks that were expected to benefit from the MSCI inclusion also failed to outperform the market benchmarks, and some popular picks even showed signs of arbitrage, with investors pocketing short-term profits.
For example, video surveillance products supplier Hangzhou Hikvision had been heavily purchased by early movers ahead of the MSCI move, but its shares fell 1.12% on Friday after gaining 3.08% in the previous session. Another popular pick, Shanghai-listed distiller Kweichow Moutai, which produces the Chinese liquor baijiu, dropped 0.82% after a 3.48% gain on Thursday.
"The positive impacts brought by MSCI's inclusion have already been factored in by now," said Liao Qun, chief economist at China CITIC Bank International. But he said that was no surprise, as similar situations occurred when Taiwanese and South Korean shares were first added to MSCI indexes.
The MSCI addition, which will be followed by an increase to the weighting in September, is expected to attract between $17 billion and $20 billion to China's onshore equity markets over the first year, according to major banks and brokerages.
Individual investors play an outsize role in China's equity markets. Unlike Western markets, where institutional investors make up a larger share of trading, small investors account for 80% of total turnover, the China Securities Regulatory Commission says. Nearly 100 million people have trading accounts in mainland China, Reuters reported.
While institutions typically analyze the fundamentals of companies in which they plan to invest, China's retail investors often pick stocks based on market rumors, policies and even the names of the companies. They also are known for high-frequency trading, which is considered to contribute to market volatility.
The tepid reaction was also shown in trading through the stock connect link between the Shanghai and Shenzhen exchanges and the Hong Kong market. Only about 2.28 billion yuan ($355 million) flowed into A-shares through the channel on Friday, down from about 6.63 billion yuan on Thursday.
"The capital inflows will stay relatively small in the short term," said Liao, as the initial weighing of A-shares is very low and China's individual investors tend to buy small-cap companies, rather than making heavy bets on large-cap companies featured in the inclusive indexes.
Some analysts expect MSCI's adoption of A-shares will prompt Chinese retail investors to chase stocks picked by institutions, pushing up the prices of large-cap companies. So far, however, individuals have shown little excitement or desire to change their investment plans.
"[The inclusion] won't have an impact on my choices of stocks," said Mr. Chu, a Chinese civil servant who has been investing in mainland stock markets for 12 years. The 50-year-old said he is more interested in buying small-cap stocks to turn quick profits. Buying large-cap companies, he said, is not an effective approach when he has only limited capital allocated to the equity markets.
"Blue chips are very expensive, but the growth is very small," he said.
Mr. Wang, an investor in Jilin Province with 20 years of experience in A-share markets, said he had never heard of MSCI or A-shares being included in global equity market benchmarks. Wang said he usually picks the more risky technology stocks and sometimes relies on information shared by friends, as he "enjoys the excitement."
After the initial inclusion, the 226 Chinese stocks now represent an aggregate weight of 0.39% in the MSCI Emerging Markets Index at a 2.5% partial inclusion factor. The percentage will rise to 0.78% in September, increasing the inclusion factor to 5%.