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The Hang Seng Index in Hong Kong has always been a poor representation of the stock universe in Hong Kong.
First and foremost, it gives a big weighting to “old economy” stocks that were promising back in the 1990s and 2000s.
However, new technology stocks from China has been on the rise over the past decade. Now, it seems like investors will finally get a chance to avoid the poor returns of the Hang Seng Index in Hong Kong.
That’s because Hang Seng Indexes Company, an index compiler from the city, is launching a new “Hang Seng Tech Index” that will track the 30 largest technology companies listed in Hong Kong, by market capitalisation.
So, here’s what investors need to know about the new Hang Seng Tech Index.
Focus on the new economy
The biggest thing that has been lacking for investors (from a sector perspective) has been a technology focus on the Hang Seng Index.
Besides Tencent, there isn’t one technology-focused stock in the top 10 constituents of the Hang Seng Index.
The new Hang Seng Tech Index will see Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988), Tencent Holdings Ltd (SEHK: 700) and Meituan Dianping (SEHK: 3690) take up the top three spots in terms of weightings (see below).
The index was launched at the start of this week (27 July) and, according to back-testing data, would have provided solid positive returns of 36.2% and 35.3% for 2019 and the first half of 2020, respectively.
Top 10 constituents of Hang Seng Tech Index
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Source: Hang Seng Indexes Company
Investing in tomorrow
The main positive is that this will produce a new tech-focused index that investors should be able to access via exchange-traded funds (ETFs).
Investing in “tomorrow’s winners” tends to be one of the best ways for investors to earn a positive return over time. That’s exactly what the Hang Seng Tech Index is made up of.
According to an interview with the SCMP, Bruno Lee, chairman of the Hong Kong Investment Funds Association (HKIFA), the new index fund is crucial to allow more fund managers in the city to provide ETFs and other passive investment vehicles that can improve access to these tech companies.
Clearly, for investors who want to tap into the long-term growth story of China’s exciting, fast-growing technology companies then the Hang Seng Tech Index will provide a solid foundation.
The expectation for Hong Kong investors is that the new index will provide a route for easier access rather than buying the individual shares of the component stocks.
Foolish bottom line
Some of the companies in the new index have seen their share prices skyrocket in 2020 as the need to “go digital” in the Chinese economy has accelerated.
This has been one trend that has been universal and the reflection in the strength of tech stocks’ share prices is no surprise.
This will provide Hong Kong investors a much sought-after way to tap into the long-term structural growth story of “tomorrow’s winners” rather than being subject to “yesterday’s losers” that currently dominate the Hang Seng Index.
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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 Tim Phillips owns shares in Tencent Holdings Ltd.