Hong Kong's HSI Widens Investor Appeal - Manulife IM

Tom Burroughes

25 August 2020

A move by Hong Kong’s Hang Seng Indexes to widen the kind of companies that can be listed increases the attractiveness of this market by removing certain distortions from the market, according to Manulife Investment Management.

After a consultation in May, the index business will make three changes, including allowing weighted voting right companies into the mix. The number of constituents in the index may rise to more than 50 during this period.

The addition of WVRs and secondary-listed companies – which are mainly from the “New Economy” sectors – could cut the HIS’s skew towards financial institutions, Winson Fong, senior portfolio manager, Greater China equities specialist, said.

“Investors should note that the rebalancing exercise is not 100 per cent rule-based, but supplemented by qualitative judgement made by a committee. This approach should reduce the chance of extreme bias towards new-economy stocks and ensure a holistic market-wide representation,” Fong continued.

The changes come at a time when Hong Kong continues to try and sharpen its attractions as an investment and financial hub, even though recent domestic political strife and mainland China's imposition of a national security law have cast a cloud over the jurisdiction.

Valuation improvement
Price-to-earnings multiples and earnings per share growth of the Hang Seng Indexes will rise because of the changes, at least in the near and medium term, Fong said.

“The change to the HSI is a continuation of the push toward making Chinese equities a more holistic proposition for foreign investors – a drive initially triggered by MSCI’s inclusion of A-shares, which phased out the segregation between offshore and onshore Chinese stocks,” Fong said.

"The stock market of Hong Kong is undergoing a major structural evolution. Some initiatives have already come to play while many others are in the making. For instance, the updated listing guidance for biotech companies was also a success, and it is expected to continue attracting more biotech companies to the Hong Kong Exchange Mainboard. This index rebalancing by HSI and the launch of the Hang Seng TECH Index are only some of the reflections of this trend,” Fong added.