Hang Seng Index to Take First Steps in Biggest-Ever Overhaul

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Details of a wide-ranging overhaul of Hong Kong’s equity benchmark is set to be announced on Friday, marking the first step to diversify the financials-heavy index.

The quarterly review is the first since Hang Seng Indexes Co. announced its biggest-ever overhaul in March, which includes boosting the total number of components to 80 from 55 by mid-2022, adding firms from underweight sectors and reducing the impact of the city’s biggest companies. The changes are expected to be made over the course of five quarterly reviews. The result of the first review will be released after the market close in Hong Kong today.

HSI’s compiler has been looking to lower the weight of financial stocks in the index to better represent the stock market, where the technology sector overtook financials to become Hong Kong’s biggest sector by market value in 2019. AIA Group Ltd. and Tencent Holdings Ltd. currently have the heaviest weighting on the gauge at around 10% each.

A chase for cyclical and value stocks in recent months has made these changes more timely, with the weight of financials in the gauge rising since February. Analysts expect the first batch of new HSI constituents will be selected from industries that are currently under-represented, such as consumer and healthcare sectors.

Hang Seng Index to Take First Steps in Biggest-Ever Overhaul

About $16 billion worth of exchange traded funds track the HSI, according to data compiled by Bloomberg. The changes to be announced on Friday will take effect from the market open on June 7.

“Balancing the weight of different industries could be a key priority in Hang Seng’s early moves in the reshuffle,” said Chi Man Wong, an analyst at CGS-CIMB Securities International Pte. But “it’s unlikely for them to add technology stocks in the first round, as the tech sector already has a relatively big weight in the index.”

New Joiners

Hang Seng is expected to add five stocks every quarter through mid-2022 in order to reduce market volatility, said Cliff Zhao, head of strategy at CCB International Securities Ltd.

Companies likely to be added include JD Health International Inc., a recently-listed drug store operator, and Chinese apparel retailer Li Ning Co., according to analysts at CGS-CIMB, CCB International and UOB Kay Hian (Hong Kong) Ltd. JD Health and Li Ning each jumped more than 3.5% on Friday.

CICC’s picks include some of the biggest companies by market value, including JD.com Inc. and NetEase Inc. Both jumped at least 3% on Friday. Analysts including Hanfeng Wang say chances of inclusion are also good for China Resources Beer Holdings Co. and infant milk powder producer China Feihe Ltd.

With technology stocks underperforming in the past three months, the addition of names from the sector could become a drag on the gauge. Hong Kong has been one of the worst-performing equity markets globally since its February high, shedding 8.5% while the tech sector has lost 28% as of Thursday.

CCB’s Zhao says Hang Seng could cut Bank of Communications Co. to lower the weight of Chinese banks. The relatively less-traded AAC Technologies Holdings Inc. and Hengan International Group Co. could also get removed. Bank of Communications and Hengan each dropped about 1% each on Friday.

Hang Seng is also expected to lower the maximum weighting for a single stock to 8% from 10%. That means the index’s current biggest members -- AIA, Tencent and HSBC Holdings Plc, all of which have a weighting of over 8% -- will see their influence in the benchmark drop. Analysts say that should occur during this rebalancing.

About HK$2.85 billion worth of passive funds is expected to flow out of Tencent, and around the same from AIA, according to calculations by CGS-CIMB. Alibaba Group Holding Ltd. might see its weight rise to 8% from the current 5%, attracting about HK$4.6 billion worth of inflows, while Chinese delivery giant Meituan could also see its weight boosted to nearly 8%, according to CGS-CIMB.

©2021 Bloomberg L.P.

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