Hang Seng index: all shook up

Hong Kong’s Hang Seng index is set for the first big shake-up in its half century existence. The 50-odd constituent stocks will swell to 80 by mid-2022, encompassing more mainland Chinese companies. Ultimately the benchmark will track 100 stocks.

About time. The existing HSI represents half the market by capitalisation and not much more in terms of turnover. It needs to become more representative.

The index is heavy on financials at a time when the territory’s role as financial centre is being undermined by a draconian national security law. Old-timers are also prominent. Half the constituents have been listed for more than 20 years. That, give or take, is the entire age of tech stars like Google, Facebook, Alibaba or Tencent. Another quarter have spent more than 15 years on public markets.

The reshuffle will give more weight to tech and mainland Chinese companies, both of which have dominated blockbuster listings in recent years. That is good news for the billions of dollars of passive money tracking the index: the relatively low weighting means the HSI has lagged behind global peers, particularly in the US, during last year’s tech-driven rally. 

The index provider is also applying an 8 per cent cap on weightings. Previously companies with secondary listings and dual class shares like Alibaba and Xiaomi were capped at 5 per cent. All told, the new line-up will represent 71 per cent of the market cap and 66 per cent of turnover

Still, proposed changes are hardly radical. Tech’s weighting inches up, according to HSI simulations, from 26.9 per cent to 28.6 per cent. It will still be dwarfed by financials, whose weighting drops to a third. A bigger bump is handed to the rather duller telecoms and utilities sector.

What should concern investors more is the plan to keep 20-25 Hong Kong stocks in the index to “sustain [its] representation”. Whether political or simply sentimental, the proposal means — almost by definition — keeping ties to old economy favourites like property, finance and conglomerates. 

Sure, the additional stocks will reduce these stocks’ relative weighting, from two-fifths now to a third and finally, once the index expands to 100 stocks, to 26.5 per cent. But Hong Kong itself has provided little new by way of tech companies in recent years. To stay in the index, companies should be relevant as well as local.

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