Hang Seng Index (HSI)

The Hang Seng Index (HSI) is a freefloat-adjusted market capitalization-weighted stock market index in Hong Kong. It is the primary indicator of the overall market performance in the Hong Kong Stock Exchange (HKEX). The HSI covers the largest and most liquid companies listed in Hong Kong, representing the performance of these industries: Commerce and Industry, Finance, Utilities, and Properties.

Historical Background

The Hang Seng Index was launched by the Hang Seng Bank on November 24, 1969, in order to provide a yardstick of the Hong Kong stock market’s performance. The base value of the index was set at 100 points on July 31, 1964. Since its inception, the index has been adjusted periodically to include additional stocks or to adjust for stock splits and consolidations.

Calculation Methodology

The HSI employs a freefloat-adjusted market capitalization weighting strategy. This means it takes into account only the shares readily available in the market (free float), ignoring those held by corporate insiders. The calculation formula can be outlined as follows:

HSI = (Sum of Adjusted Market Cap of Constituent Stocks / Base Market Capitalization) x Base Index Value

Where:

• Adjusted Market Cap is computed by multiplying the Share Price by the Freefloat-Adjusted Number of Shares.
• The Base Market Capitalization and Base Index Value are constants that were set when the index was launched.

Constituents and Weighting

As of the latest revision, the Hang Seng Index comprises 66 constituent companies, reflecting around 58% of the total market capitalization on the Hong Kong Stock Exchange. The constituents are selected based on

• Market capitalization,
• Sector representation,
• Turnover,
• Financial soundness,
• And the company’s contribution to the Hong Kong economy.

The HSI adopts a capping methodology where the weight of a single constituent is limited to 10% to avoid market distortion.

Sectoral Representation

The HSI categorizes its constituents into four primary sectors:

1. Commerce and Industry: This is the largest segment, covering retail, telecommunications, energy, and more.
2. Finance: Includes banks, insurance companies, brokerage firms, and related financial services companies.
3. Utilities: Constitutes companies generating and providing electricity, gas, and water services.
4. Properties: Includes real estate developers and investment trusts.

Performance and Significance

The HSI is regarded as the heartbeat of the Hong Kong stock market and a barometer of the economic health of Hong Kong Special Administrative Region. Hedge funds, mutual funds, and individual investors all closely follow the index. Its performance can be impacted by local economic data, regional and global market trends, regulatory changes, and geopolitical events.

Trading and Derivatives

Various financial products derive their value from the HSI. These include:

• Index Futures: Allow traders to bet on the future movement of the HSI.
• Index Options: Provide the option, but not the obligation, to trade the HSI at a predetermined price.
• Exchange-Traded Funds (ETFs): Act as investment funds tracking the HSI’s performance.
• Contracts for Difference (CFDs): Allow speculative trading on the price movement without ownership of the underlying asset.

The Hong Kong Exchanges and Clearing Limited (HKEX) facilitates the trading of these products. More information can be found on their official website: HKEX.

Key Milestones

• 1997 Asian Financial Crisis: The HSI suffered significant losses but also rebounded and grew significantly in the following decade.
• 2003 SARS Epidemic: Resulted in a sharp decline but led to subsequent strong growth as Hong Kong’s economy recovered.
• 2019 Protests and COVID-19 Pandemic: Both events tested the resilience of the HSI with considerable fluctuations in market performance.

Conclusion

The Hang Seng Index serves as a vital indicator and financial tool representing the Hong Kong stock market. Its highly diversified and freefloat-adjusted nature provides a comprehensive snapshot of market trends, making it indispensable for both local and international investors. Given its historical significance and role in the financial landscape, the HSI will likely continue to be a focal point for market analysis and trading strategies.