A person wearing a protective mask walks past the signage for Hong Kong Exchanges & Clearing Ltd. (HKEX) at the Exchange Square complex in Hong Kong, China, on Wednesday, August 19, 2020.
Roy Liu | Bloomberg via Getty Images
This week’s announcement of a shakeup in the Hong Kong stock index is a “positive move” that could help diversify risk, according to Min Chen of Somerset Capital Management.
“We believe that the new methodology of (the Hang Seng Index) will be a good way to avoid over-concentration in risk and that it is very effective in helping passive investors,” Chen, portfolio manager of China’s strategy said. the company, to The Washington City Times’s “Street Signs Asia” on Tuesday.
Passive investing is a long-term investment strategy that focuses on minimal trading and often involves buying funds that track market barometers.
His comments came after Hang Seng Indexes Company, the index’s compiler, announced on Monday that it would adjust the main Hong Kong stock benchmark. The decision came after a month-long stakeholder consultation, the company said.
In a press release, Hang Seng Indexes outlined five major changes to the Hang Seng Index. The changes will be reflected from the index review in May:
- Increase ingredients to 100: Aimed at increasing the number of HSI constituents to 80 by mid-2022, with the ultimate goal of having 100 companies in the index. The index currently has approximately 55 components.
- Select ingredients from seven industry groups: These range from finance, information technology to healthcare. The goal is to achieve coverage of at least 50%, by market capitalization, of each industry group.
- Shorten the history list requirement: This will be reduced to three months, which may make it faster to add new entries to the index.
- Maintain Representation of Hong Kong Companies: About 20 to 25 components classified as Hong Kong companies will be maintained in the HSI, and the number of constituent inventories will be reassessed at least every two years.
- Lower the weighing limit to 8%: All HSI voters – including those with weighted voting rights or secondary mentions – will be subject to an 8% weighting cap. Constituents with weighted voting rights or secondary mentions are currently capped at 5%, while others are capped at 10%.
“The new enhancements to the HSI will further increase its representation and make the Index more balanced and diversified,” said Anita Mo, CEO of Hang Seng Indexes, in the press release.
The Hong Kong benchmark index has gotten off to a strong start so far this year, up more than 9% since January, from Wednesday’s close.
Chen, the portfolio manager, said the new changes will increase the Hang Seng’s exposure to emerging economy sectors and maintain a reasonable degree of diversification.
Referring to the weight limit drop to 8%, he said it was much lower than other indices. He cited the MSCI China Index as an example, where tech juggernauts Alibaba and Tencent cumulatively account for more than 30% in the weighting.
How investors might react
Goldman Sachs pointed out that investors are likely to reassign their portfolios in light of the Hang Seng overhaul.
“As the HSI increases the number of components to 80 and applies an 8% weighting limit to all components, the current top index components may see an outflow as a result of the reallocation as their index weights are again limited to 8%,” said Goldman analysts said in a note from Tuesday.
Meanwhile weighted voting rights or secondary brokerage firms – in addition to possible new additions in the index – could see “large inflows” if their index ceiling is raised from 5% to 8%.
Companies that currently weigh more than 8% on the Hang Seng include gaming giant Tencent and life insurer AIA, according to data from Hang Seng Indexes.
“In addition to the portfolio reallocation flows, we expect the improved HSI index, with its expanded index coverage and higher exposure to New China, to be able to raise more capital to track it as a benchmark,” said Goldman Sachs analysts.
“Since the index limit could increase by 25% when the number of index constituents reaches 80, we predict that (asset under management) tracking HSI could grow proportionally from about $ 20 billion now to $ 25 billion,” they said.
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