Edward Au, Southern Region Managing Partner, Deloitte China, Chairman of the Institute’s Corporate Finance Advisory Panel, and an Institute member
The Stock Exchange of Hong Kong has become home to an increasingly diverse range of companies in recent years, thanks to the April 2018 listing regime expansion, which embraced the innovative and tech-driven companies of the new economy, weighted voting rights structures, and secondary listings.
The best is yet to come. The highly welcome changes to the Hang Seng Index (HSI) will not just see the index more fully reflect the diversity of Hong Kong’s capital market, but also further cement our city’s status as an investment gateway to the new economy, Mainland China, and as an international financial centre.
This transformation of the HSI – the biggest in its 52-year history – will see its number of constituents increase from 52 to 80 by mid-2022, with a possible expansion to 100 constituents at a later date.
As well as being a welcome expansion of index diversity, this transformation will result in the market capitalization of the HSI increasing to HK$3.3 trillion, its coverage expanding from 56.5 percent to 71.2 percent of the Hong Kong stock market, and overall price-earnings multiples rising from 15.7 times to 19.1 times.
With the HSI already the most representative and important Hong Kong benchmark for local and international investors alike, this bold transformation can only enhance its status as an index of choice for portfolios across the world. This, in turn, will provide a welcome boost to Hong Kong capital market’s potential and liquidity, and appeal to the growing universe of index tracker funds.
It will also facilitate the development of new investment products that will enable Hong Kong to attract a broader range of investors, and strengthen our city’s status as an important channel for investment in the new economy – with the market having previously been dominated by financials and property – as well as emerging businesses not just in Hong Kong and the Greater Bay Area, but across the Mainland.
Hong Kong has already shown its ability to outshine many other markets during difficult times – especially during the COVID-19 pandemic – and the imminent transformation of the HSI can only enhance that lustre.
“This, in turn, will provide a welcome boost to Hong Kong capital market’s potential and liquidity, and appeal to the growing universe of index tracker funds.”
Wong Chun Yee, Director, Corporate Finance, OCBC Bank, Member of the Corporate Finance Advisory Panel, and an Institute member
On 1 March, Hang Seng Indexes Company announced the consultation conclusion on reforming the HSI. Critics, however, say the reform is tailored to Mainland Chinese issuers, dwarfs Hong Kong local issuers and demotes Hong Kong to a regional financial centre. Sensation aside, the HSI is the de-facto index representing the Hong Kong stock market. Hong Kong has been a bridge between issuers and global investors for more than two decades, providing top Mainland companies with access to offshore capital markets. Therefore, the domination of HSI constituents by Mainland issuers, regardless of the reform, is simply a reflection of how the Hong Kong stock market is structured. On the bright side, this serves as a good reminder of Hong Kong’s current position in the global financial market and where the city is heading.
The massive number of quality Mainland issuers listed in Hong Kong have, and continue to draw the attention of investors worldwide. The strong performance of these issuers, coupled with the low economic growth and low interest rate environment in developed economies, left investors from all parts of the world who were previously not interested in Asian markets with no choice but to take a closer look at these Mainland issuers and the Hong Kong market as a whole. Quality companies in countries with low appeal to investors such as those countries traditionally classified as “emerging markets” could leverage the increased attention from global investors on the Hong Kong market and increase their exposure to global investors through Hong Kong. Though bankers, lawyers and accountants in Hong Kong have largely ignored potential opportunities from companies outside China within the last decade, it is never too late for us to promote the city’s capital market to other countries.
The HSI is one of the most closely-monitored indices in the world. The increase in the number of constituents of the HSI will provide more of an incentive for Chinese as well as top non-Chinese companies in Asia to list in Hong Kong. Therefore, Hong Kong should make use of this opportunity and step up its efforts in bringing more diversity to its capital market. Doing so will enhance and maintain its position as a leading international financial centre.
“The increase in the number of constituents of the HSI will provide more of an incentive for Chinese as well as top non-Chinese companies in Asia to list in Hong Kong.”
Timothy Shen, Chairman, Safari Asia Limited, Member of the Corporate Finance Advisory Panel, and an Institute member
The upcoming changes to the HSI have received wide support from Hong Kong’s investment community and retail investors. In addition to improving the benchmark of the HSI’s overall coverage and achieving a more reasonable representation for each industry, the changes also reflect market changes within the new economy, which are driven by technology and pre-revenue biotechnology companies in a more balanced manner. For example, the HSI will prevent leading companies such as Tencent from dominating, as it proposes to lower the upper limit of a single stock from the current 10 percent to 8 percent, similar to the Hang Seng TECH Index, which provides a better risk diversification.
The changes will attract more retail investors and institutional funds (especially pension funds) to view the HSI as a benchmark or passive fund tracking for stock allocation strategies. With this increased demand, the turnover rate and trading activities of the constituent stocks will be greatly enhanced, and the importance of the Hong Kong market will increase. With more trading activities and a higher market value of stocks, listed companies in Hong Kong may also enjoy advantages in areas such as capital operation, financing, equity pledge, and frequency of changing hands etc., which will further attract more companies to list on the Hong Kong Stock Exchange.
The HSI will also further strengthen the attractiveness of Hong Kong as an international financial centre in the long term, especially as a “gateway” for investing in China’s new economy and connecting to overseas capital and investors. As it is already an established trend for Mainland companies to list both in the United States and in Hong Kong, a greater market capitalization in Hong Kong’s pre-eminent index will ensure a better balanced portfolio of Mainland versus non-Mainland stocks to minimize an over-concentration of Mainland stocks in the HSI.
Lastly, the HSI will prevail over other major markets, with the exception of the U.S., by including a greater percentage of the market capitalization of the underlying stock exchange, which will improve Hong Kong’s status as one of the top capital markets.
In conclusion, we should expect the HSI to reach higher, record levels in 2021 and the following years to come.
“The HSI will also further strengthen the attractiveness of Hong Kong as an international financial centre in the long term.”
