Revamp of Hang Seng Index - Market Spotlight - Hang Seng Investment Management Limited

Revamp of Hang Seng Index: A key milestone in history that investors should embrace

1 Mar 2021

What happened?

Hang Seng Indexes Company Limited (“HSIL”) announced the consultation results of Hang Seng Index (HSI) on 1 March 2021, after soliciting market feedbacks on the potential revamp of the Index in late Dec 2020. The changes will be implemented starting from May 2021 index review and effective in the June 2021 index rebalancing.

Our views

As one of the leading passive strategy investment managers in Hong Kong, we have been welcoming the positive changes made to HSIL’s flagship indexes. We view HSI’s consultation results as one of the key milestones in history. Largely in-line with our expectations, below are the details of the results as well as our views:

HSI’s Consultation Results Summary:

Key Changes	Background And Our Views
Increase number of constituents from 52 to 100	Background HSIL targets to increase the number of constituents to 80 gradually through regular index reviews by mid-2022, and ultimately fixed the number at 100. Our Views This is a positive, structural move to solidify the index’s representativeness. Started with only 33 constituents at launch, the index has gradually increased to 50 constituents in 2012 and 52 in Dec 2020. Market capitalization coverage ratio of the index has, however, gradually decreased to 58%, as compared to 65% five years ago. The increase in number of constituents will uplift the coverage ratio of Hong Kong stock market, and in turn, maintain the index’s leadership position.
Cap all individual constituent’s weighting at 8%	Background Prior to the revamp, the weighting cap is 10% for individual constituents, and 5% for WVR/ secondary listed companies. After the change, all constituents’ weighting will be aligned at 8%. Our Views The weighting cap change will prevent single stocks from taking up high weightings of the index, reinforcing the effect of diversification and a more balanced approach to include smaller capped companies.
Select index’s constituents by industry group based on target coverage	Background The methodology would be to select representative constituents from each industry group, with the target to achieve market capitalization coverage of not less than 50% for each industry group (Appendix). Our Views The change will reduce the dominance of specific industries in the index, such as the heavy-weighted Financials. This will create a more balanced representation of the industries in the Hong Kong stock market, bringing a more diversified and complete opportunity set for HK-listed equities.
Relax the minimum listing history requirement for potential eligible candidates	Background The listing history requirement for potential eligible candidates will be shortened to 3 months. Our Views With more quality and large companies having new or secondary listings in Hong Kong, the relaxation of the requirement will inject greater flexibility for the Hang Seng Index’s advisory committee to introduce new stocks in the index.
Maintain representation of Hong Kong companies in the index	Background HSIL will maintain 20-25 constituents that are classified as Hong Kong companies in the HSI. Our Views Hang Seng Index has been reflecting the development of the Hong Kong stock market over the years. With increasing number of mainland companies listing in Hong Kong, we believe maintaining an appropriate portion of Hong Kong companies will continue to bring out HSI’s colour, as one of the most reputable and renowned benchmarks in Hong Kong.

Overall, we believe these changes will bring a positive long-term impact to HSI, maintaining its position as “the most representative and important benchmark of the Hong Kong stock market” as suggested by HSIL.

In particular, we highlighted 3 key points that investors should take note of:

A more attractive, long-term investment case for passive investors.
With greater market representation, flexibility and diversification of the index, we believe this is a structurally positive story for index investors who are interested to tap into a more diversified and complete opportunity set for HK-listed equities, ranging from both the ‘new economy’ to ‘traditional economy’ universes.
A re-rating story to reflect the ascent of the ‘new economy’ segments.
A more balanced coverage in different industry groups will lead to inclusion of more ‘new economy’ constituents, mainly in technology and healthcare firms, uplifting the overall earnings growth of the index. This will offer tremendous growth potential for investors over the long-term.
HSI’s flexibility to change brings greater investor confidence.
The changes resulted from the consultation are a testimonial on HSI’s open-mindedness, innovation and diversity to adjust in an ever-changing market landscape. HSI, reflecting the international and diverse nature of the Hong Kong stock market, will bring greater confidence and investment appeal for global investors over the long term.

Appendix

Industry Group	Industry (According to Hang Seng Industry Classification System)
1	Financials
2	Information Technology
3	Consumer Discretionary, Consumer Staples
4	Properties & Construction
5	Utilities, Telecommunications
6	Healthcare
7	Energy, Materials, Industrials, Conglomerates

Link to HSIL’s official consultation paper result announcement:
https://www.hsi.com.hk/static/uploads/contents/en/news/pressRelease/20210301T000000.pdf

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