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Potential of Hong Kong stocks: Hang Seng HK 35

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Share classes in Hong Kong – 

Hong Kong is a globally respected financial centre that operates in line with international standards. In terms of share types, there exists another series of categories that serves as an indicator of the geographical and shareholding nature of a particular stock. 

Stocks listed in the Hong Kong market can be categorised into four broad share classes: Hong Kong Companies, H-Shares, Red-Chips and P-Chips respectively. These share classes are loosely defined and different index compilers might have slightly different definitions. Generally speaking, however,  ‘H-Shares’ refers to shares issued by companies incorporated in mainland China, ‘Red-Chips’ refers to shares issued by companies that are incorporated outside the Mainland but are controlled by Mainland-affiliated entities, and ‘P-Chips’ refers to stocks issued by privately owned Mainland companies. All other shares fall into the ‘Hong Kong Companies’ share class category. Given the differences between these classes, their performance can often differ quite significantly for any given period of time. 

In order to assist the public in understanding the features of these share classes, Hang Seng Indexes has launched several indexes that individually reflect the performance of one particular class of shares, including the Hang Seng HK 35 (HSHK35), which covers shares in the Hong Kong Companies class.

An index to cover Hong Kong companies

The HSHK35 was launched in 2003. Compared with the Hang Seng Index (HSI), which includes equities from all share classes, the HSHK35 only covers equities in the Hong Kong Companies class. The index includes the top 35 largest Hong Kong Companies equities with adequate liquidity as constituents. 

Following the latest index rebalancing, which took place on 2 September 2016, the top five constituents of the HSHK35 are HSBC Holdings, AIA, CKH Holdings, HKEx, and CLP Holdings. The 35 constituents usually cover 60 per cent of the total market capitalisation of the share class and 75 per cent of its aggregate turnover. The constituents are generally well established – more than 70 per cent of them have a listing history of at least 10 years and eight constituents have been listed for more than 50 years. 

In terms of industry distribution, HSHK35 is more evenly distributed when compared with the HSI and the Hang Seng China Enterprises Index (HSCEI), which is a widely used benchmark for measuring the performance of the mainland China enterprises with H-share listings in Hong Kong.

For example, as shown in Exhibit 1, as at 2 September 2016 subsequent to index rebalancing, the largest industry component in the HSHK35 was Financials, similar to the HSI and HSCEI, but it had a much lower aggregate weighting of around 36 per cent relative to its aggregate weighting in the HSI and HSCEI, which were 46 per cent and 70 per cent respectively. Properties & Construction, the second largest industry in the HSHK35 index, accounted for 25 per cent of the index weighting, a figure which was approximately 11 p.p. and 20 p.p. higher than the sector’s weighting in the HSI and the HSCEI. As HSHK35 covers only Hong Kong companies, its industry distribution could provide a better representation of Hong Kong’s economic structure, which leans towards Financials, Properties & Construction, and Utilities.

Exhibit 1. Industry Distribution
 

The HSHK35 has delivered a solid return in the past few years. The index has outperformed both the HSI and the HSCEI in three of the five most recent complete calendar years and, as at the end of August 2016, was holding the leading position among the three for 2016 to date. During the period under analysis (1 Jan 2011 – 31 Aug 2016), the HSHK35 achieved a 4.3 per cent positive overall return, while the HSI and the HSCEI both failed to deliver a positive overall return.  

In addition to returning a solid performance, the HSHK35 has also consistently recorded a lower annualised volatility than the two major indexes. During the period under analysis, the overall annualised volatility of the index was 17.15 per cent, while those of the HSI and the HSCEI were 18.99 per cent and 24.47 per cent respectively. This particular characteristic of the HSHK35, together with its positive performance, enhances the ability of the index to provide higher risk-adjusted returns to investors.

Exhibit 2: Performance

^ Data cut-off as at 31 August 2016

Generally, as all the HSI constituents which have been categorised as Hong Kong Companies are also included in the HSHK35, the correlation of the HSHK35 with HSI usually remains at a level of approximately 0.9. During the period under analysis, the overall correlation with the HSI was 0.94. 

As the HSCEI and the HSHK35 represent different share classes and there is no overlapping between their constituents, the correlation between the two is naturally lower – the overall correlation was 0.83, but the correlation on an annual basis was more volatile. The annual correlation between the HSCEI and the HSHK35 dropped from 0.81 in 2013 to 0.61 in 2014, before rising back to 0.78 in 2015. The lower correlation with the HSCEI potentially makes the HSHK35 a risk-diversification tool for investors who are holding HSCEI products or other China equities in their portfolios.

To summarise, the HSHK35 serves as a market benchmark for the performance of Hong Kong Companies stocks and, in the past few years, it has generated a better risk-adjusted return than the HSI or the HSCEI. Given its low volatility and relatively lower correlation with China equities, it might potentially be a suitable investment for risk diversification purposes.

One sign of the emerging market demand for related product is the recent issue of an exchange-traded fund that tracks the index’s performance. 
 


Disclaimer
Investments involve risks. Information provided herein is for information and reference only and does not constitute nor is it intended to be construed as any professional advice, offer or solicitation to deal in any of investments mentioned herein. The past performance is not indicative of future performance.

 

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