Hong Kong expands benchmark stock index, prepares money managers for major revamp with US$68 billion at stake

Zhang Shidong
·4-min read

Hong Kong’s stock market will add three stocks to the blue chip index in a month when the benchmark compiler is readying investors for one of the biggest makeovers since its inception in late 1969.

The compiler, Hang Seng Indexes Company, added Alibaba Health Information, Longfor Properties and Haidilao International after its quarterly review, raising the constituents to 55 with effect from March 15. The move will add US$124.5 billion, or about 8.5 per cent to the current index capitalisation. The trio advanced by at least 2.4 per cent in reaction.

Ten stocks were added to the benchmark gauge in quarterly reviews over the past three years, with nine rising by 2 per cent to 6.6 per cent immediately after the announcements. Seven of the eight that exited the index declined by 1.6 to 5.8 per cent.

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Money managers with almost US$68 billion tracking Hong Kong’s main stock indices will have another reason to pay closer attention this week after the market sell-off last week. The compiler is set to unveil the results of its public consultation about index reconstruction later Monday. Among others, it has proposed to boost the index to between 65 and 80, limit each stock weightage to 8 per cent, and widen the industry representation.

“The quarterly rebalancing review will not cause much volatility and we need to pay attention to the results of the consultation,” said Bruce Pang, head of macro research at China Renaissance Securitie. “If the compiler is determined to proceed with the reform, that will cause some repercussions in the market.”

The new-economy will definitely be the winners given the underlying economic shifts, he added, while the traditional sectors like property developers will be the losers as they already have more weighting than they should.

Apart from the number of constituents and the cap on individual stock weightage, Hang Seng Indexes Company also sought feedback to maintain at least 25 Hong Kong companies to retain the local flavour and prevent mainland companies from dominating the benchmark.

Mainland companies made up 28 of the 52 members and commanded 58.4 per cent weight in the Hang Seng Index at the end of January, according to the compiler. In the entire market, however, they made up 52 per cent of the listed entities and 81 per cent of the market capitalisation.

“Local and old economy stocks will bear the brunt of the adjustment, with new economy firms especially those from mainland benefiting from it,” said Linus Yip, chief strategist at First Shanghai Securities in Hong Kong. “The adjustment will optimise the Hang Seng Index, as more constituents will be better and the representation scope is wider.”

The decision to add the three stocks from March 15 suggests the shift in favour of mainland tech stocks will be inevitable. Alibaba Health, Longfor and Haidilao have matched or outperformed the Hang Seng Index over the six and 12 months, according to Bloomberg data. They will have a combined 2.09 per cent weightage.

Alibaba Health surged 7.5 per cent, while Haidilao added 6.4 per cent in immediate response after the review was announced on Friday. Longfor added 2.4 per cent at local noon break.

Tencent Holdings and AIA Group are the two biggest constituents, each with 10 per cent presence. There are speculations recent debutants like Kuaishou Technology and JD.com would eventually make the list too, analysts said.

“Hong Kong’s capital market is becoming a listing hub for China’s leading new-economy companies and the trend will be there for a long time to come,” Wang Hui, Zheshang International Financial Holdings. “Tech will become the biggest-weighted sector.”

The changes, if implemented, would be among the biggest since the Hang Seng Index debuted in November 1969. In one ground-breaking move last May, the compiler admitted Chinese technology companies with multiple voting rights. That opened the door for Xiaomi Corp, Meituan and Alibaba Group Holding, the owner of this newspaper.

Investors will have to brace for higher market volatility though. Massive price swings in such stocks have contributed to the wildest market rides since August. The Hang Seng Tech Index slumped 15.2 per cent last week, the worst since it was introduced in late July.

Some US$38.7 billion of passive funds tracked the Hang Seng indices at the end of January, according to data published by the stock exchange. They were also invested in US$29.2 billion worth of exchange-traded products linked to the benchmark, the Composite and the Technology indexes.

Additional reporting by Iris Ouyang

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