TheStreet

China's economy may have slowed to its weakest pace in three decades, thanks in part to a damaging trade war with Washington, but new changes to the way investors can track Chinese equities could give American investors a crack at the world's hottest stock market later this year.

MSCI, a global securities index provider, is planning to increase the weighting of the currently hard-to-access China A shares in its global stock benchmark. The change is certainly not before time: China makes up roughly 14.9% of global GDP, according to the International Monetary Fund, a figure that is expected to hit 19.2% by the end of this year. China-listed shares, however, comprise less than 1% of the emerging markets benchmark.

China A shares, which currently represent just 0.8% of the MSCI Emerging Market index, are Shanghai and Shenzhen listed. MSCI plans to get China A shares to a 3.3% weighting of its EM index By November 2019, a move it estimates will trigger $80 billion in new capital inflows as investors around the world rush to mirror the changes.

"This should increase demand for Chinese A shares over time, as people benchmark to the index," said Michael Reynolds, an investment strategy analyst at The Glenmede Trust Company, which manages roughly $42 billion.

In addition to broader access to A shares, investors holding H shares -- which are those listed in Hong Kong -- would be able to be more easily connected to the A shares market.

"A lot of American investors use the MSCI benchmarks for performance purposes, and if you're put against a benchmark, A shares have to be on your mind," Reynolds said. "In terms of ... getting access to the market, the Shanghai Hong-Kong stock connect is a linkage between {the two exchanges}."

That could add even more upward pressure on Chinese stocks, which have rebounded from their worst year since 2008 to the top of the global leaderboard, although wealth managers are saying potential gains resulting from the index change would likely happen over a longer time period.

The Shanghai Composite Index has gained nearly 24.39% so far this year, nearly double the 11.37% gain for the S&P 500.  

 

Some notable Chinese companies U.S. investors can now get more exposure to are Baidu (BIDU - Get Report) , e-commerce giant Alibaba Holding  (BABA - Get Report) , and Tencent (TCEHY) . These groups are part of the giant American-Chinese tech group, the so-called FAANG + BAT group (Facebook (FB - Get Report) , Apple (AAPL - Get Report) , Amazon (AMZN - Get Report) , Netflix (NFLX - Get Report) , Google (GOOGL - Get Report) ), plus the three big Chinese tech companies with a collective market cap of just under $1 trillion.

However, some U.S. wealth managers aren't planning to take advantage of the tailwind by allocating drastically more money into China-focused funds.

"We're not going to up our Chinese exposure," said Mike Loewengart, vp of investment strategy at E*Trade. "This news is not cause to readjust your portfolio in a major way."

Reynolds said Glenmede isn't adding to its China exposure based on the index change either, adding that active fund managers "are starting to think about their current positioning - they're starting to think thoughtfully about adding positions, or if they want to be structurally underweight." 

Beyond the potential for new foreign investment, China also has a lot to gain from a potential trade deal with the United States, even as the government attempts to reduce reliance on exports and stoke the country's growing middle class consumer in order to fuel further economic growth, which E*Trade's Loewengart highlighted as a trend that will partly shape his view on opportunities in the region.  

Glenmede wrote in a note out Monday there are parts of a potential trade agreement that are currently unaddressed, causing uncertainty in the region solely on the basis of trade.

London Capital Group's head of research Jasper Lawler said "Whilst US - China trade deal talk buoyed stocks, at the start of the week, the positivity faded as investors look for concrete evidence on progress," in a brief out Tuesday.

Of course, a comprehensive and official trade agreement between the world's two largest economies would be hugely beneficial to the Chinese economy in particular, which relies on exports to the U.S. for some discernible portion of its GDP growth.

The trade dispute has hit China's growth in the past year or so. Tuesday, Premier Li Keqiang cut Chinese GDP growth expectations to between 6% and 6.5%, down from 6.6%. The new projection is the weakest forecast in 30 years. 

Still, on a longer-term basis, Glenmede's Reynolds likes the China region.

"You have this demographic surge in the middle class in China," he said. "You're going to see an explosion in middle class consumers. The companies that will be able to cater to that rising class of consumers will be positioned for attractive levels of growth over the long term."