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Wednesday, March 06, 2024

Understanding the Hang Seng Index

By Century Financial in 'Blog'

Understanding the Hang Seng Index
Understanding the Hang Seng Index

Synopsis:
The article explores the Hang Seng Index (HSI), covering its structure, major components, and investment methods. It reviews the HSI's historical performance, highlighting its response to global economic events. The piece also discusses China's market potential and recent economic measures, emphasising the HSI's significance in investment strategies.

What is the Hang Seng Index?

The Hang Seng Index (HSI) is a market-capitalization-weighted Hong Kong Exchange (HKEx) index, encompassing the largest traded companies. Serving as a key equity market indicator for Hong Kong and broader Asian markets.

HSI's inception dates back to 1969, with a base period starting on July 31, 1964, and an initial value of 100. Representing around 65% of the total market capitalization, HSI aims to mirror the Hong Kong Exchange's leadership. Given Hong Kong's unique administrative status in China, the close economic ties between the two regions are reflected in the significant presence of Chinese companies listed on the HKEx.

The Hang Seng Index Structure

The Hang Seng Index (HSI) tracks the performance of the 50 biggest companies listed on the Hong Kong Stock exchange (HKSE). These companies are chosen based on their size (market value), trading activity (volume), and how well they represent different sectors of the Hong Kong stock market.

The HSI is a market-capitalization-weighted index. To prevent any single company from having too much sway over the index, a cap of 8% is applied. This means no company can account for more than 8% of the HSI's total value.

Industries and Components

The individual industries covered by the HSI, along with their weights, are:

Sector Weight
Communication Services 17.66%
Consumer Discretionary 16.54%
Consumer Staples 3.99%
Energy 14.05%
Financials 32.74%
Health Care 1.86%
Industrials 2.84%
Information Technology 2.58%
Materials 1.48%
Real Estate 4.00%
Utilities 2.26%

Top Holdings

As of February 2024, the weightings are:

Long Comp Name Weight CMP (HKD)*
Tencent Holdings Ltd 9.07% 276.2
Industrial & Commercial Bank of China Ltd 6.67% 4.02
PetroChina Co Ltd 5.88% 6.22
Alibaba Group Holding Ltd 5.17% 74.62
China Mobile Ltd 5.06% 66.9
Bank of China Ltd 4.47% 3.08
China Construction Bank Corp 4.34% 4.85
HSBC Holdings PLC 4.01% 60.65
China Merchants Bank Co Ltd 2.99% 29.8
CNOOC Ltd 2.79% 16.7

What are the different way to invest in the Hang Seng Index?

Investing in the Hang Seng Index (HSI) can be done in several ways including through Exchange-Traded Funds (ETFs) or index funds that track the performance of the HSI. These financial instruments replicate the index's composition, allowing investors to invest in a diversified portfolio of the stocks that make up the HSI. .

Synopsis:
You can put money into the HSI through - ETFs like Krane Shares CSI China Internet ETF and ishare MSCI China ETF. These Instruments are available for trading on the Century Trader platform.

Some other ways of investing in the index include investing through futures and options contracts and structured products.

Historical Performance Trends of the Hang Seng Index

Source: Bloomberg

The chart above provides an illustrative overview of the Hang Seng Index's historical performance, highlighting key periods and trends. Here's a more data-driven perspective on these periods:

01

Asian Financial Crisis (1997-1998):

The Index dropped from around 15,000 to 10,000 points, reflecting the severe impact of the crisis on regional markets.

02

Dot-com Bubble (2000-2002)

The Index experienced a fluctuation from approximately 17,000 to 9,000 points, mirroring the global impact of the dot-com bubble burst.

03

Mid-2000s Economic Boom (2003-2007)

A steady upward trend is seen, with the Index climbing from 11,000 to 21,000 points, driven by robust economic growth in Hong Kong and China.

04

Global Financial Crisis (2008)

The Index saw a dramatic drop to around 12,000 points, in line with the global financial downturn.

05

Bull Market (2017-2018)

The Index reached its peak, moving from 30,000 to 31,000 points, driven by strong economic performance and investor confidence.

06

Recent Years (2010s-2020s):

This period has been marked by volatility, with the Index fluctuating between 24,000 and 28,000 points, influenced by various global and regional events, including the US-China trade war and the COVID-19 pandemic.

Is China a Good Place to Invest?

The Chinese government has recently announced a stimulus package that includes cutting the reserve requirement ratio (RRR) by 50 basis points. This will release 1 trillion yuan ($139.8 billion) in long-term capital. The government has also said it will encourage banks to lend to qualified developers. Some analysts believe that these measures are not enough to address the underlying challenges in the Chinese economy, such as weak consumer confidence and a property market slump. Others believe that the government will take more action in the coming months, such as increasing fiscal spending.

In Summary:

The Hang Seng Index is a barometer of Asia's economic health, offering key insights into the interlinked economies of Hong Kong and China. It's a vital tool for investors aiming to navigate and capitalize on the Asian markets' growth potential. Amidst global economic shifts, the HSI remains a strategic component for a diversified investment portfolio.

How do you plan to integrate insights from the Hang Seng Index into your investment strategy?

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