Overview of Hang Seng Index

During 2000-2010, the Hang Seng Index was increasingly affected by the macro economy of Mainland China as more and more large-scale A + H central enterprises were listed and the constituent stocks were included.

Overview of Hang Seng Index

Current Profile

Amongst the current 50 constituent stocks of the Hang Seng Index, listed companies with their operating revenue mainly generating from Mainland China account for about half of the 50 constituent stocks, and the other half are listed companies whose business is mainly based in Hong Kong (two are Macau gaming stocks). Amongst the listed companies that mainly generated revenue from Mainland China, in terms of market capitalization, Tencent is the largest one that currently occupies nearly 10% of the total market value of the HSI. The banking and insurance sector, which composed of mainly Chinese domestic banks and insurance giants, takes up another big portion of market share in HSI. The energy sector was determined by the 3 big ones, PetroChina, CNOOC and Sinopec.

Similarly, amongst listed companies that have their business origin in HK in the HSI constituent stocks, banking and insurance sector also accounts for a large market share. HSBC Holdings and AIA are Hong Kong's local leaders, followed by the property sector, the four major family real estate companies (Sun Hung Kai, Henderson, Cheung Kong, New World Development). Hong Kong's local utilities (transportation and electricity) sector also accounts for a certain proportion in HSI, such as the MTR Corporation and The HK and China Gas.

What is the latest trend?

Compared with the previous component stocks in Hang Seng Index which mainly cover traditional industries including finance, real estate, and utilities, the Hang Seng company has incorporated more stocks in the biotechnology and technology sectors into the index. Although the traditional industry is the barometer of the macro economy, it is believed that the technology sector will lead the market in the future.

Based on the above situation, analyze the trend of the Hang Seng Index and the factors that affect the fluctuation of the Hang Seng Index

From 2000 to 2010, the Hang Seng Index became increasingly affected by the macro-economy of Mainland China after increasing A + H large state-owned enterprises were listed and included in the HSI constituent stocks. Following the rapid growth of Chinese GDP during the decade of 2000-2010, the Hang Seng Index has kept soaring until the 2008 global financial crisis. After 2015, HSI has regained momentum following the conclusion of the European debt crisis, recovery of developed markets’ economy and the reduced but stable growth of the Chinese GDP YOY figure. This trend has remined before the commencement of the Sino-US trade dispute in 2018. After 2018 and before the current coronavirus pandemic of 2020, the Hang Seng Index has fluctuated under the domestic and global geopolitical factors such as the Sino-US trade war.

Current market outlook after the outbreak of coronavirus

Entry level: Hang Seng Index P / E ratio of 7-8
Limit level: when the Hang Seng Index P / E ratio reaches 15-17 (currently around 10)
Stop level: Hang Seng Index P / E ratio drops to 9 or below

The current coronavirus pandemic will cause considerable pressure on the performance of listed companies in the first quarter and even the second quarter of 2020. Due to the high contagion of the virus (though the mortality rate is not high), many industries find notoriously difficult to resume production and supply chain shock surfaced. In terms of monetary policy, the People's Bank of China has provided more liquidity through measures such as open market operations. In terms of fiscal policies, measures such as reducing social insurance payment ratios and reducing taxes were targeted on SMEs. Nevertheless, many small and medium-sized enterprises are expected to go bankrupt in this crisis.

The easing from the People's Bank of China and the global central bank provides very limited impact to the economy

At present, the purpose of all central banks to cut interest rates and undergo various open market operations is to increase market financing liquidity and reduce the refinancing costs of SMEs that are expected to be most affected by the pandemic, but will this enable the SMEs to weather this crisis? not really. First of all, most banks will not easily issue more loans to SMEs in order to ensure their asset quality. Secondly, liquidity cannot solve the current fundamental supply chain problems.

The current fundamental supply and demand issues will be further reflected in the revenue and profits’ slump of many listed companies in the Hang Seng Index./p>

Interest rate cuts and easing are likely to further reduce the already low net interest margin of the banking industry, and SME cash flow disruption will increase the bank's non-performing loan ratio. In terms of energy and public utilities, the pandemic has caused oil price plunge, and personal and business travel has fallen sharply. The airline industry ’s flight volume has plummeted. In terms of real estate sector, first-hand real estate sales stagnated, and the default rate of commercial real estate tenants increased. All important industries have been hit devastatingly.

When will there be a rebound

The improvement of real economy will come amidst the ameliorated listed companies’ revenue/ profit, and the subsequent recovery in employment and inflation. The Hang Seng Index is expected to regain momentum after the global pandemic sees sign of contain and re-start of the supply chain.

Risks

The coronavirus is likely to make the global index fall more than what 2008 GFC or any financial crisis had dropped. The credit crisis in 2008 was mainly caused by housing lending and housing price bubbles. This current pandemic has made the “globalized factories” stop production and cease demand, and this shakes the foundation of economy, that is, the supply and demand.

Hong Kong's current linked exchange rate policy has caused the trend of the US market and the US dollar to impact on the Hong Kong dollar and the Hang Seng Index. If the US epidemic lost its control in the short term and the US index and the US dollar continue to weaken, it may drag down the Hang Seng Index further.

HS 50 20 years trend

HS50 trend in recent years


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