Hang Seng Index: review likely to offer more of the same as Kuaishou, JD Health and Li Auto tipped to increase tech, pharma dominance
- The latest changes to the benchmark Hang Seng Index will be made on Friday and will take effect from March 13, according to Hang Seng Indexes Company
- Kuaishou, JD Health and Li Auto are among the common picks that could potentially be added to the index at China Renaissance Securities and CICC
Kuaishou, JD Health and Li Auto are among potential candidates to make it to the blue-chip index when the review is announced on Friday, according to the common picks at local brokerages including China Renaissance Securities and China International Capital Corp.
“Decisions on inclusion are political as well as market-based, as they naturally impact fund flows to chosen sectors and companies,” said Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital in Hong Kong. The changes are likely to be highly correlated to increasing longer-term tensions in US-China relations, he added.
Kuaishou and JD Health have slumped 15.6 per cent and 18.7 per cent this year, after recording little change and a 12 per cent jump in 2022, respectively. Li Auto has surged more than 23 per cent this year, after a nearly 40 per cent crash last year.
Hang Seng Indexes Company, the index compiler, added seven tech and healthcare stocks in the past two years, including Alibaba Health, JD.com and Hansoh Pharmaceutical. As a result, the weightage of commerce and industry stocks rose to 55.84 per cent from 47.94 per cent, increasing their influence. The latest constituent changes will be made to the indexes with effect from March 13, it said.
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Speculation about the likely index winners may give the stocks a pop, Silvers said, even though the broader market has struggled this month to sustain a run-up from late October. The Hang Seng Index has declined in the past three consecutive weeks, and lost nearly 9 per cent since the rally peaked on January 27.
Geopolitical tensions, hawkish noises from US policymakers and corporate earnings disappointment are among key headwinds. Mainland investors showed a lack of conviction about the strength and magnitude of China’s economic rebound, according to a Goldman Sachs survey earlier this month.
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“The Hang Seng Index as a whole will likely continue its sideways pause, after a nice upswing this year, due to ongoing concerns over inflation, China slowdown, and [worsening] geopolitical environment,” Silvers said.
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Meanwhile, local broker KGI International tipped China Resources Power and milk-powder maker China Feihe to join the blue-chip index. Both recorded positive earnings in the past and they are one of the most important players in their respective industries, it added.
“They tend to include more stocks from the consumption sector,” said Kenny Wen, head of investment strategy, referring to the inclusion of Tingyi and jewellery brand Chow Tai Fook in recent reviews. Tech picks including Kuaishou might not make it this time as they are still unprofitable, he added.
State-owned China Resource Power jumped 8.7 per cent so far this year while Feihe saw a 0.5 per cent uptick. The two slumped 37 to 39 per cent in 2022.
“Investors want the index to reflect larger, cornerstone companies, as it traditionally has, but officials may be increasingly willing to have it reflect Beijing’s funding priorities,” Kaiyuan Capital’s Silvers said.
“To do so, however, may lessen the utility of the index itself.”
