What it means
A stock index combines the share prices of many companies into one number, so that people can follow the market at a glance. The Hang Seng Index was first published in 1969 and is compiled by Hang Seng Indexes Company, a subsidiary of Hang Seng Bank.
It includes a selection of leading companies from sectors such as finance, technology, property and utilities. The index is weighted by market capitalisation, which means that larger companies have a bigger influence on its movement.
It also adjusts for free float, the portion of shares that is actually available for the public to trade. Constituents are reviewed regularly, so the list of companies changes over time.
Many of the index's members are Hong Kong-listed firms with strong links to mainland China, so the index reflects Chinese economic conditions, policy and investor sentiment as well as local factors. Global investors use it as a gauge of Asian risk appetite.
Its movements can be affected by interest rates, trade news and regulation. Investors cannot buy the index itself, but they can invest in exchange-traded funds and other products designed to follow it.
Futures and options on the index also allow investors to hedge or speculate. Fund managers use it as a benchmark to judge whether their own portfolios have done better or worse than the market.
A reader should remember that an index level is only a scale. A rise from 18,000 to 19,800 matters because of the percentage change of 10%, not because of the number of points.
Also, the index covers only part of the market, and different indices can tell different stories. Businesses with Hong Kong exposure watch it for context.
A sustained fall can signal weaker confidence, tighter funding conditions and softer demand, which may affect sales forecasts, property values and share-based pay. It is one indicator among many, however, and should be read alongside interest rates, currency moves and company results.
In practice
Real-world examples.
Example
A fund manager in London runs an Asian equity fund and uses the Hang Seng Index as a benchmark. At the end of the quarter, her fund is up 6% and the index is up 4%. She reports that the fund outperformed by two percentage points, and she lists the holdings that contributed most to the difference.
Example
A global company with a Hong Kong subsidiary tracks the index to gauge local market sentiment. The treasurer notices a sharp fall and reviews the subsidiary's share-based pay plan. She asks whether the plan still motivates staff, and the human resources team prepares options to restore its value.
Example
A retail investor in Singapore buys an exchange-traded fund that follows the index. She likes that one purchase gives her exposure to dozens of companies. She checks the fund's fees before buying, and she notes that the fund's returns may differ slightly from the index because of costs.
Formula
Calculation
Index return = (ending level - starting level) / starting level
Suppose the index stands at 18,000 at the start of a year and 19,800 at the end. The change is 19,800 - 18,000 = 1,800 points.
Return = 1,800 / 18,000 = 0.10, which is 10%.
An investor with $50,000 in a fund that tracks the index exactly, ignoring fees, would end the year with 50,000 x 1.10 = $55,000.Case study
Seen in the real world.
Harbourview Investments is a fictional wealth manager that held a portfolio of Asian shares for its clients. A client asked why the portfolio had underperformed over the previous year.
The adviser compared the portfolio with the Hang Seng Index and showed that the index itself had fallen 8% while the portfolio had fallen 5%. In the illustrative discussion, the adviser explained that the portfolio had a smaller weight in the most volatile sectors.
The client accepted the explanation and agreed to keep the strategy. The firm used the index as a benchmark in every future report so that results could be judged against a clear standard. Over time, clients came to understand that relative performance told them more than raw returns.
Watch out
Common mistakes.
- Treating the index level as meaningful on its own, when percentage change is what matters.
- Assuming the index represents the whole of the Chinese economy, when it covers companies listed in Hong Kong.
- Ignoring that the list of constituents changes, so long-term comparisons are not like for like.
Questions
People also ask.
What is the Hang Seng Index?
It is a market capitalisation weighted index of leading companies listed in Hong Kong.
Can I invest in it directly?
Not directly, but funds and derivatives are designed to follow it.
Why is it used as a benchmark?
Because it is a recognised measure of the Hong Kong market against which fund results can be compared.
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