Hong Kong’s Hang Seng (HSI) is a stock market index that has been the top indicator of the overall market performance of the territory. Its 50 constituents are the largest companies by market capitalization listed at the Hong Kong Stock Exchange. Together, they account for some 58% of the total capitalization of the exchange.
To be precise, the Hang Seng is a free-float-adjusted, market cap-weighted index. What exactly does that mean? The market cap of a constituent is calculated by adding up the value of all its shares that are readily available in the market. Sounds like a pretty fair methodology indeed.
The origins of the Hang Seng index reach back to November 1969, when a couple of Hang Seng Bank bigwigs figured it would be a good idea to launch a market index in the vein of the Dow Jones.
Hang Seng Constituents
As mentioned, the constituents of the Hang Seng are some of the biggest companies listed at the Hong Kong Stock Exchange.
HSBC Holdings plc. is obviously on the list, together with Bank of China Ltd, and Hang Seng Bank Ltd.
The constituents are grouped into several categories, such as consumer goods, industrial goods, energy, utilities, materials, financials, services, telecommunications, property and construction etc.
How does a company get included in the Hang Seng index?
Needless to say, the club of Hang Seng constituents is a very exclusive one. To get in, companies go through thorough vetting, lengthy analysis and scrutiny from an external consultant. They also need to fulfill a number of criteria, without which they are not even considered.
One such requirement is that companies need to be in the segment that makes up the top 90% of all ordinary shares. They also need to be in the category of companies which make up the top 90% of the total turnover of the Hong Kong Stock Exchange.
Yet another requirement is for companies to have a minimum listing history of 24 months.
Even if a company is found eligible, it needs to beat out the competition in regards to turnover rankings, market capitalization and financial performance among others.
As far as representativeness goes, the Hang Seng is right up there with the best-known overseas indices. To maintain its representativeness at a high level, the HSI makes sure that the total market value of the shares of its constituents stays at around 60% of the value of the market. This is one of the reasons why would-be constituents need to fulfill such exigent requirements.
The formula by which the Hang Seng calculates its value is publicly available.
As mentioned, the index is made up of several sub-indexes based on the company profiles of its constituents. Thus, there is a finance sub-index, a utilities sub-index etc.
The latest shock that befell the Hong Kong’s economy, causing the HSI to plummet some 375 points, came in June 2018. It was caused by raising of the interest rate and the tightening of mortgage lending.