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ATM: The Hong Kong Market’s FAANGs

In May, the Hang Seng Indexes Company announced that weighted voting rights (WVRs) and secondary-listed companies will be allowed to be included in its benchmark Hang Seng Index.

At the same time, tense Sino-US relations drove Chinese companies to pursue listings in Hong Kong. These trends will bring important changes to the index, and the formation of a tech-heavy, Hong Kong-style FAANG (the acronym for the tech giants of the US).

What is the significance of all this? And what’s in it for investors interested in China’s technology space?

FAANG’s prominence increasing post-Covid-19

FAANG stocks are characterised by their explosive growth rates, and symbolise the rising power of the new digital economy. Covid-19 has further accelerated their ascent.

Not only have all FAANG stocks fully recovered from the March market crash, their shares are all up year-to-date – with Amazon stock rising as much as 41%.

While COVID-19 has paralysed the brick-and-mortar economy, it has boosted the world’s migration to an online, digital-forward life. This has greatly elevated the prominence of the FAANGs in the stock market.

This is most evident in the strong performance of the tech-heavy Nasdaq index. Since the crash in March, all three major US indices have rebounded strongly.

But only the Nasdaq has risen to show a year-to-date gain of nearly 10% (at the time of writing), while both the Dow Jones and S&P 500 are still behind.

This is directly related to the weightings of the FAANGs in the respective indices. FAANGs account for nearly 40% of all Nasdaq components, while only 16% and 9% respectively for S&P 500 and Dow Jones.

Shaping up of Hong Kong’s own FAANGs

The Hong Kong investing community has already coined Alibaba Group Holding Ltd (NYSE: BABA) (SEHK:9988), Tencent Holdings Ltd (SEHK:700) and Meituan Dianping (SEHK:3690) as “ATM” – Hong Kong’s own technology champions.

Yet, only Tencent is a Hang Seng Index constituent. Therefore, the collective influence of ATM is yet to rival that of FAANG. This is about to change, though.

The Hang Seng Indexes Company will allow WVR and secondary-listed stocks to be included in the benchmark index, starting with the August 2020 index review. The market has widely been expecting Alibaba and Meituan to be included.

Based on the latest April data from the HSI Company, the weight of Tencent in the benchmark index is 11.29%. The new guidelines cap the individual weighting of WVRs and secondary-listed stocks at 5%.

Different versions of simulation abound, with most estimating Alibaba’s weight to be around 3-3.5%, and Meituan at 3.5-5%. This means the combined weighting of ATM could reach 17.79% to 19.79%. This is close the the FAANG weighting in the S&P 500.

Electronic devices and Internet of Things (IoT) specialist Xiaomi Corp (SEHK:1910) is another stock widely tipped to be included in the benchmark index.

However, compared to ATM, Xiaomi is not in the same league when it comes to market cap, investors enthusiasm and growth prospects.

With plenty of Chinese tech stocks coming to list in Hong Kong, it is likely that the ATM club will find an eligible new member soon.

What’s in it for investors?

While China-US tensions will continue to cause jitters to the markets, it is also opening up opportunties for the Hong Kong stock market. Apart from the company listings, the relatively cheap Hong Kong market could attract capital flows.

This will likely all benefit ATM. On the other hand, the addition of ATM would boost the tech sector’s weighting, and inject vitality and dynamism into the Hang Seng Index.

All this points to the more robust growth potential of the index and its related ETFs.

Investors could, of course, consider individual ATM stocks but should avoid buying when market euphoria is high, as I believe it is with Meituan recently.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Wendy So doesn't own shares in any companies mentioned.