HK's Hang Seng Index takes first steps in biggest overhaul to diversify financials-heavy benchmark

Changes to Hong Kong's equity benchmark are expected to be made over the course of five quarterly reviews. PHOTO: AFP

HONG KONG (BLOOMBERG) - A wide-ranging overhaul of Hong Kong's equity benchmark is set to begin on Friday (May 21), marking the first step to diversify the financials-heavy index.

The quarterly review is the first since Hang Seng Indexes (HSI) announced its biggest-ever overhaul in March that includes boosting the total number of components to 80 from 55 by the middle of next year, 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.

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 and Tencent currently have the heaviest weighting on the gauge at around 10 per cent 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.

"Balancing the weight of different industries could be a key priority in Hang Seng's early moves in the reshuffle," said CGS-CIMB analyst Chi Man Wong.

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".

About US$16 billion (S$21.3 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.

New joiners

Hang Seng is expected to add five stocks every quarter through the middle of next year in order to reduce market volatility, said CCB International Securities head of strategy Cliff Zhao.

Companies likely to be added include JD Health International, a recently listed pharmacy operator, and Chinese apparel retailer Li Ning, according to analysts at CGS-CIMB, CCB International and UOB Kay Hian (Hong Kong).

CICC's picks include some of the biggest companies by market value, including JD.com and NetEase.

Analysts, including CICC chief strategist Wang Hanfeng, say chances of inclusion are good for China Resources Beer and infant milk powder producer China Feihe.

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 per cent while the tech sector has lost 28 per cent.

Mr Zhao says Hang Seng could cut Bank of Communications to lower the weight of Chinese banks. The relatively less-traded AAC Technologies and Hengan International Group could also get removed.

Hang Seng is also expected to lower the maximum weighting for a single stock to 8 per cent from 10 per cent. That means the index's current biggest members - AIA, Tencent and HSBC, all of which have a weighting of more than 8 per cent - 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 might see its weight rise to 8 per cent from the current 5 per cent, attracting about HK$4.6 billion (S$789 million) worth of inflows, while Chinese delivery giant Meituan could also see its weight boosted to nearly 8 per cent, according to CGS-CIMB.

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