The Hang Seng Index is the main equity benchmark in Hong Kong, tracking the largest, most liquid companies. Its transformation over the decades reflects how this financial hub has evolved. In 1998, shortly after the British handover of Hong Kong, only one mainland company was on the index. However, as China gained more clout worldwide, its companies began to dominate the market, squeezing out some local and British companies. As I recently wrote, the Hang Seng has become a proxy for the state of the Chinese economy (thus, recent U.S.-China trade tensions have sent the index into bear market…
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The Hang Seng Index is the main equity benchmark in Hong Kong, tracking the largest, most liquid companies. Its transformation over the decades reflects how this financial hub has evolved.
In 1998, shortly after the British handover of Hong Kong, only one mainland company was on the index. However, as China gained more clout worldwide, its companies began to dominate the market, squeezing out some local and British companies.
As I recently wrote, the Hang Seng has become a proxy for the state of the Chinese economy (thus, recent U.S.-China trade tensions have sent the index into bear market territory). Here’s a look at the massive shift over just two decades:
|Top 10 largest stocks by market cap|
|31 December 1998||31 December 2008||24 September 2018|
|1||5 HSBC||857 PetroChina||700 Tencent|
|2||941 China Mobile||941 China Mobile||1398 ICBC|
|3||16 Sun Hung Kai||1398 ICBC||857 PetroChina|
|4||11 Hang Seng Bank||939 CCB||939 CCB|
|5||13 Hutchison Whampoa||5 HSBC||941 China Mobile|
|6||2 CLP||3988 BOC||1288 ABC|
|7||12 Henderson Land||386 Sinopec||2318 Ping An|
|8||19 Swire||2628 China Life||5 HSBC|
|9||6 HK Electric||1088 Shenhua||3988 BOC|
|10||3 HK China Gas||883 CNOOC||386 Sinopec|
Source: Data provided by S&P Global Market Intelligence
In 1998, China Mobile was the only China-based company in top 10 holdings. The Hang Seng Index at that time was highly influenced by Hong Kong’s real estate sector.
In 2008, UK-based HSBC remained a significant player but no longer dominated. In just a decade, the Hang Seng became dominated by Chinese companies—9 of its top 10 holdings. All of them were state-owned enterprises (SOE).
Reflecting another change in China’s economy, by 2018, Tencent, a non-SOE, had become the top dog in town.
How the Hang Seng Index works
Today, since the Hang Seng is weighted by “freefloat adjustment” for investability and is capped at 10% to avoid a single stock dominating the index’s daily movements, the non-SOE companies with higher freefloat have higher influence on the Hang Seng Index’s up and down movements. According to the Index Methodology for managing the Hang Seng Index, “shares held by any entities (excluding custodians, trustees, mutual funds and investment companies) which control more than 5% of the shareholdings would be considered as non-freefloat and are excluded from index calculation.” That is to say, shares held by government, founders & management, corporate cross holdings and lock-up shares are all fall into the non-freefloat investor class.
According to Hang Seng Indexes, as of 31 August 2018, the 10 largest constituents and their weighting in the Hang Seng Index are:
|941 China Mobile||5.12%|
|2318 Ping An||4.45%|
You can see HSBC (no.8 market cap) becomes no. 1 weighting because actually no entity can make up more than 5% of the total weighting. In other words, it is 100% freefloat. Actually, both HSBC and Tencent are dual champion of HSI weight capping at 10% at the beginning of Q2 2018. The largest market cap, Tencent, dropped more than HSBC in Q2 and surprisingly becomes no. 2 by weighting as of 31 August 2018—until Hang Seng Indexes Limited rebalances again at the beginning of Q4.
Interestingly, ICBC (no. 2 by market cap), of which the Chinese government holds 70% of shares, accounts for just 4.81% weighting on the HSI, while much smaller insurance group AIA has an astonishing 9.23% weighting. As with HSBC, no major entity holds more than 5% since AIG has disposed of its stake.
Like many other world indexes, the Hang Seng has changed drastically over the years. One thing that has remain consistent is its incredible long-run performance. Real estate often gets the headlines in Hong Kong, but it might surprise you to know that the Hang Seng has not only outperformed HK real estate over the long run, but the margin is meaningful. I detail all that and much more in a new special report I’ve put together, “The 4 Rules for Winning in the Stock Market: A Foolish Guide for Hong Kong Investors.”
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Disclosure: Hayes Chan, CFA, is The Motley Fool Hong Kong’s investment analyst. Hayes does not own shares of any companies mentioned. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.