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Hang Seng Tech Index: What You Need to Know Before Investing
January 4, 2021
The Hang Seng Index in Hong Kong has always been a poor representation of the stock universe listed in the city.
First and foremost, it gives a big weighting to “old economy” stocks that were promising back in the 1990s and 2000s but are now in decline.
However, new technology stocks from China have been on the rise over the past decade. Luckily enough, investors now have a chance to avoid the poor returns of the Hang Seng Index in Hong Kong.
That’s because Hang Seng Indexes Company, an index compiler from the city, in the middle of 2020 launched a new “Hang Seng Tech Index”.
It consists of 30 of the largest technology companies listed in Hong Kong, by freefloat market capitalisation weighting.
So, here’s what investors need to know about the Hang Seng Tech Index before deciding whether it’s right for them.
Focus on new economy
The biggest thing that has been lacking for investors (from a sector perspective) has been a technology focus on the Hang Seng Index.
Prior to the third quarter of 2020, besides Tencent Holdings Ltd (SEHK: 700), there wasn’t one technology-focused stock in the Hang Seng Index.
That has now changed, with Xiaomi Corp (SEHK: 1810), Alibaba Group Holding Ltd (SEHK: 9988), and Meituan Dianping (SEHK: 3690) being included in the benchmark Hang Seng Index.
Meanwhile, the new Hang Seng Tech Index reflects this as the three relatively-new Hang Seng Index constituents are also in the top six of the new tech-focused index (see below).
Top 10 constituents of Hang Seng Tech Index
Source: Hang Seng Indexes Company, as of 30 November 2020
Investing in tomorrow
The main positive is that the tech-focused index will end up seeing investors being able to access the opportunities via ETFs, which we are already witnessing.
Investing in “tomorrow’s winners” tends to be one of the best ways for investors to earn a positive return over time. That’s exactly what the Hang Seng Tech Index is made up of.
According to an interview with the SCMP, Bruno Lee, chairman of the Hong Kong Investment Funds Association (HKIFA), the new index fund is crucial in allowing more fund managers in the city to provide ETFs and other passive investment vehicles that can improve access to these tech companies.
Clearly, for investors who want to tap into the long-term growth story of China’s exciting, fast-growing technology companies then the Hang Seng Tech Index provides a solid foundation.
The expectation for investors is that the index provides a route for easier access rather than buying the individual shares of the component stocks.
Riding the digitalisation wave
Some of the companies in the new index have seen their share prices skyrocket in 2020 as the need to “go digital” in the Chinese economy has supercharged the transition to tech.
This has been one trend that has been universal and the reflection in the strength of tech stocks’ share prices is no surprise.
As we start 2021, this will provide investors with a much sought-after way to tap into the long-term structural growth story of “tomorrow’s winners” in China.
That’s much more desirable than being subject to “yesterday’s losers” that currently dominate the Hang Seng Index.
Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Tencent Holdings Ltd and Alibaba Group Holding Ltd.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.