The Hang Seng Index (HSI) is a market capitalization weighted index that is made up of the 50 largest companies that trade on the Hong Kong stock exchange. The index is considered the most widely quoted barometer for the Hong Kong economy. Trading hours for the Hang Seng Index are 9:30 a.m. to 12:00 p.m. and 1:00 p.m. to 4:00 p.m. Hong Kong Standard Time.
The Hang Seng index is integral to Hong Kong and it continues to evolve. The index gives investors a snapshot of the health of Hong Kong’s stock market. Because Hong Kong is a global economy, the Hang Seng is frequently considered a proxy for the broader Asian market.
In this article, we’ll take a closer look at the Hang Seng Index with particular emphasis on how the index has evolved as mainland Chinese companies have become a major part of the index.
A History of the FTSE 100
The Hang Seng index is a capitalization-weighted index that is made up of 50 of the largest and most liquid companies listed on the Hong Kong Stock Exchange.
The Hang Seng index debuted in 1969. Prior to Hong Kong’s handover to mainland China from the British, the index featured very few mainland Chinese companies. However, since 1997, Hong Kong is a “special administrative region” of China.
According to Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners, opening the index to mainland companies shows that Hong Kong is coming to terms with the reality of Chinese influence. Says Lo, “Instead of calling it a good thing or a bad thing, I see it as a natural evolutionary process for Hong Kong to survive.”
This has significantly changed the composition of the Hang Seng index. Today, less than 50% of the stocks listed on the Hang Seng were on the index 20 years ago. This transformation has increased not only the number of Chinese companies that appear on the index, but also the weight that these companies carry.
What Sectors are Represented in the Hang Seng Index?
The influence of mainland China can be seen in the composition of the prominent sectors of the Hang Seng index since 1997. Here’s a closer look at each sector. The weightings assigned are as of December 2021.
Financials – Historically, this sector carries the most weight on the index. It peaked at 51% in 2009. As of 2021, it was tied for the most weight on the index at 20%.
Properties and Construction – This sector has been more volatile. At the time of the handover, this sector accounted for 27% of the index. After falling to 11 percent in 2011, this sector has bounded back to comprise about 20% of the index’s weighting.
Industrials – This sector has shrunk to a mere 4% of the index. In 1997, the sector was 12% of the index.
Energy and Mining – This sector has emerged since the handover in 1997. With that in mind, it’s to be expected that the sector is primarily made up of Chinese companies such as Sinopec and CNOOC Ltd. The sector accounts for about 5% of the index.
Healthcare – This sector accounts for approximately 7% of the index.
Consumer Staples – This sector accounts for about 7% of the index.
Consumer Discretionary – This sector accounts for approximately 15% of the index.
Information Technology – This is another sector that has emerged on the index since the handover in 1997. This sector is made up of two gigantic Chinese companies that combine to make this sector 7% of the overall index.
Telecommunications – This is another sector that had diminished in its influence on the sector. In 1999, the sector’s weighting was up to 26% but it has dropped to approximately 4%. Two large Chinese companies, China Unicom Hong Kong Ltd. and China Mobile Ltd are dominating the sector.
Conglomerates – Along with industrials and telecommunications this is the smallest of all the sectors carrying just 4% of the index’s weighting.
How Can Investors Invest in the Hang Seng Index?
Investors who are considering investing in the Hang Seng should be mindful that the index carries a higher risk profile than many U.S. investments. One reason for this is that companies operating in China carry greater political risk. However, investors can trade stocks on the Hang Seng Index by purchasing shares of the individual components. This gives investors an opportunity to focus on particular sectors of interest.
Like the NASDAQ or S&P 500, the Hang Seng is the underlying index for many exchange-traded funds (ETFs). There are also different versions of the Hang Seng index that separate the index into a variety of niches. The major indexes include:
- Hang Seng China Enterprises Index
- Hang Seng China Affiliated Corporations Index
- Hang Seng China H-Financials Index
- Hang Seng Corporate Sustainability Index
- Hang Seng Mainland 100
- Hang Seng HK 35
- Hang Seng REIT Index
- HIS Volatility Index
- Hang Seng China 50 Index
- Hang Seng China AH Premium Index
- Hang Seng China A Industry Top Index
For U.S. investors, investing in the Hang Seng can be tricky. None of the ETFs are traded in the United States. A good alternative is the iShares MSCI Hong Kong Index Fund ETF (NYSEARCA:EWH). This fund tracks the MSCI Hong Kong Index which, like the Hang Seng, is a capitalization-weighted index.
Another option for investors to consider is American Depositary Receipts (ADRs) which represent individual companies on the Hang Seng. Another option is to trade derivatives such as contracts for difference (CFDs). Some of the more popular options include:
- Hang Seng Index CFDs
- Hang Seng Index Futures
- Hang Seng Index Options
- Hang Seng Index Stocks and ETFs
What are the Risks of Investing in the Hang Seng Index?
The most significant cause of volatility in the Hang Seng index is the relationship between the United States and China. In 2018, the Hang Seng Index plummeted due to investor concern over the slow pace of trade talks between the two countries. Also, in 2021 the Hang Seng index temporarily delisted two telecom stocks due to perceived links with the Chinese military.
Other factors that may affect the Hang Seng Index include the relative strength of the Hong Kong dollar as well as the overall economic outlook for China.
The final word on the Hang Seng index
Perhaps no other country represents both the risk and reward of the global economy than China. Ever since Great Britain turned over Hong Kong to mainland China in 1997, the Hong Kong financial markets have been coming under the increasing influence of mainland companies. China’s influence on their neighboring economy is reflected in the Hang Seng Index. For this reason, the Hang Seng index is not only considered a barometer for the state of Hong Kong’s economy, but also a proxy for the economic health of the entire region.
American investors cannot invest directly in any of the many Hang Seng index funds but can find some U.S. ETFs that track Hong Kong stocks.
