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Changes to the Hang Seng index could help investors diversify risks, strategist says

A ourselves wearing a protective mask walks past signage for Hong Kong Exchanges & Clearing Ltd. (HKEX) displayed at the Barter Square complex in Hong Kong, China, on Wednesday, Aug. 19, 2020.

Roy Liu | Bloomberg via Getty Images

This week’s announcement hither a shakeup in Hong Kong’s stock index is a “positive move” that could help diversify risks, be consistent to Somerset Capital Management’s Min Chen.

“We believe that (the Hang Seng Index’s) new methodology will be a good way to put a stop to overconcentration in the risks and it’s very effective to help the passive investors,” Chen, portfolio manager of China strategy at the dense, told CNBC’s “Street Signs Asia” on Tuesday.

Passive investing is a long term investment strategy aimed at littlest trading, and often involves buying into funds that track market barometers.

His comments came after Carry on Seng Indexes Company, the compiler of the index, announced Monday it would tweak the main Hong Kong ordinary benchmark. The decision came after a month-long consultation exercise with its stakeholders, the company said.

In a press hand out, Hang Seng Indexes outlined five main changes to the Hang Seng Index. The changes will be implemented starting from the measure review in May:

  1. Increase constituents to 100: Targeting an increase in the number of HSI constituents to 80 by mid-2022, with the ultimate aspiration of having 100 firms in the index. The index currently has about 55 constituents.
  2. Select constituents from seven work groups: These range from financials, information technology to health care. The target is to achieve at least 50% coverage, by buy capitalization, of each industry group.
  3. Shorten listing history requirement: This will be reduced to three months, storming it potentially faster for new listings to be added to the index.
  4. Maintain representation of Hong Kong firms: About 20 to 25 constituents classified as Hong Kong theatre troupes will be maintained in the HSI, and the number constituent stocks will be reevaluated at least every two years.
  5. Lower the weighting cap to 8%: All HSI constituents — which cover those with weighted voting rights or secondary-listings — will be subject to a weighting cap of 8%. Constituents with weighted voting rights or imitated listings are currently capped at 5%, while others are capped at 10%.

“The new enhancements to the HSI will further increase its representation and score the Index more balanced and diversified,” Anita Mo, CEO of Hang Seng Indexes, said in the release.

Hong Kong’s benchmark key has had a strong start so far this year, rising more than 9% since January, as of its Wednesday close.

Chen the portfolio forewoman said the new changes will increase exposure of the Hang Seng to new economy sectors, as well as maintain a reasonable amount of diversification.

Purporting to the weighting cap decline to 8%, he said this was much lower than other indexes. He cited the MSCI China Ratio as an example, where tech juggernauts Alibaba and Tencent cumulatively account for more than 30% in weighting.

How investors sway react

Goldman Sachs pointed out that investors will likely reallocate their portfolios in light of the Match up Seng overhaul.

“As the HSI raises the number of constituents to 80 and applies an 8% weighting cap on all the constituents, the top current index constituents could see outflows led by the reallocation as their token weights would be re-capped at 8%,” Goldman analysts said in a Tuesday note.

… We expect the enhanced HSI index, with its magnified index coverage and higher exposure to New China, could attract more capital to track it as the benchmark.

Goldman Sachs

Temporarily, weighted voting rights or secondary listing firms — in addition to potential new additions in the index — could see “large inflows” as their table of contents cap is lifted to 8% from 5%.

Firms that currently have a weighting of more than 8% on the Hang Seng subsume gaming giant Tencent as well as life insurer AIA, according to data from Hang Seng Indexes.

“In uniting to the portfolio reallocation flows, we expect the enhanced HSI index, with its expanded index coverage and higher exposure to New China, could entice more capital to track it as the benchmark,” the Goldman Sachs analysts said.

“As the index cap could increase by 25% when the mass of index constituents reaches 80, we forecast the (assets under management) tracking HSI could grow proportionally from on all sides of US$20bn now to US$25bn,” they said.

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