Hang Seng Indexes, compiler of the benchmark index for the Hong Kong stock market, faces an uphill struggle to add qualifying new stocks to the benchmark in each of its next three quarterly reviews to meet a target of 80 by mid-2022, a senior executive said.
“We still maintain the target to reach 80 constituent stocks by mid next year. But … we may not always be able to reach the target if we cannot find the right stocks to add to the index,” Daniel Wong, director and chief index officer at the Hang Seng Indexes Company, told the South China Morning Post in a telephone interview.
“We want to expand the number of constituent stocks … but it is more important to make sure the stocks we choose to add in the Hang Seng Index qualify and can meet all the requirements of having a big market cap, high turnover, with good financial performance and can represent their industries.”
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In the past two quarterly reviews, Hang Seng Indexes chose only three new stocks each time and removed one, giving a net addition of five and bringing the total to 60 as of September 6.
This means that the next three quarterly reviews would need to add about seven stocks each time to meet the 80 target, which Wong said would be “difficult”.
“We will not lower the threshold for picking [new] blue chips in a bid to meet the target number. If we cannot meet the target of 80 next year, fine. We can gradually find the right candidates to add to the index over the longer term,” he said.
The index compiler last Friday added a mixed bag of consumer, finance and manufacturing firms to the Hang Seng benchmark during its latest quarterly review, avoiding most of the internet and Big Tech companies targeted by China’s regulators.
Chinese sportswear retailer Li Ning, glassmaker Xinyi Glass Holdings and China Merchants Bank will become constituent stocks of the Hang Seng Index from next month, Hang Seng Indexes said in a statement on Friday. It will remove Bank of Communications from the index.
Wong said the index compiler is not avoiding Big Tech firms due to the regulatory crackdown or market volatility.
“Hong Kong is a free market and stocks go up and down all the time. We review stock suitability against an overall framework. Volatility is a consideration but not the only reason behind the decision to include or exclude a stock from the benchmark,” he said.
With respect to Bank of Communications’ removal, Wong said it was because the compiler wanted to have more of a balance of companies from the seven industries that make up the index. “Financial stocks have been dominant. If we add in a bank and not remove another, the financial stock weighting would be too high,” he said.
With 80 stocks, the HSI would cover 71 per cent of Hong Kong’s total market capitalisation, up from 56.6 per cent as of the end of January. It would also account for 66 per cent of market turnover, up from 50 per cent now, Hang Seng Indexes said in March.
Robert Lee, vice-chairman of the Hong Kong Securities Association, said Hang Seng Indexes may need more time to reach the target of expanding constituent stocks in the benchmark index to 80.
“It would be better for Hang Seng Indexes to gradually add in the constituent stocks instead of adding far too many in a short period of time, as that would only create more volatility in an already volatile market,” Lee said.
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