Hang Seng Index Adjustment: focus on some of the new economic leaders, index expansion is likely to accelerate

The preview may be adjusted:Based on the existing data and index adjustment methods, and through the understanding and verification of the systemically optimized compilation method through the previous adjustment results, we estimateBaidu-SW, Kuaishou Technology-W, JD Health, BeiGene, Ltd., Semiconductor Manufacturing International Corporation, Hansoh Pharmaceutical Group, Bilibili Inc.-SW and China Gas ranked at the top of the Hang Seng Index and could be included as potential candidates.

Our calculations give priority to market capitalization, combined with factors such as the representativeness of various industries. However, historical experience shows that the final results may vary greatly in the actual adjustment, mainly because some of the factors that serve as the basis for the decision-making of the index advisory committee, such as the representativeness of the industry and the place of listing, do not have a detailed or quantitative basis, not to mention that the compilation method itself is still under continuous optimization, so the above forecast can only be roughly delineated as a reference.

Potential weight change:Based on the above forecasts, we measure the possible weights and capital flows of the corresponding stocks. In addition, due to the 8 per cent weight ceiling set by the index, the weights of HSBC Holdings PLC and AIA Group Limited are likely to be passively reduced to 8 per cent from the current 8.32 per cent and 8.19 per cent, leading to potential passive capital outflows.

The pace of subsequent expansion of constituent stocks does not rule out acceleration.So far, there are 66 constituent stocks of the Hang Seng Index, which is mentioned in the optimization proposal issued in March 2021.The goal of increasing to 80 by mid-2022 is still a long way off.. However, reviewing the results of four adjustments since 2021 (3 in the first quarter, 2 in the second quarter, 4 in the third quarter and 2 in the fourth quarter of 2021), the overall pace of capacity expansion is slower than expected. This means that if this target is to be achieved, the quarterly adjustment and August semi-annual adjustment will need to increase by an average of seven. If this is the case, the pace will be significantly accelerated and the scope of inclusion will be further expanded.

Hang Seng Composite Index Adjustment: will affect the scope of some Hong Kong stocks

Unlike other indices such as the Hang Seng Index, the Hang Seng Composite Index adjusts once every half a year, so this time it will only be adjusted locally and in a small range.According to the rules, some eligible newly listed companies, such as newly listed companies in the first quarter and meeting the criteria for inclusion in large and medium-sized Hang Seng Composite Index, can be included this time and then enter the Hong Kong Stock Exchange. In the light of the above conditions and taking into account whether other additional conditions for inclusion in the Hong Kong Stock Connect can be met, we estimateConch environmental protectionMay meet the inclusion criteria of the Shanghai-Hong Kong Stock Connect.

In addition, it is a constituent stock of the Hang Seng Composite Index.Shang Tang-WThe additional 6 months and 20 trading days required for inclusion in the Shanghai-Hong Kong Stock Connect will be met in August this year (listed on December 31, 2021), so we expectIt will be included around August this year.

Timetable: closing announcement on May 20 and implementation on June 13; consequential adjustment of Hong Kong Stock Exchange Standard

In terms of time, the Hang Seng Index Company willMay 20, 2022The official results of the adjustment of the Hang Seng series index will be announced after the close of trading on Friday.June thirteenth(Monday) officially implemented. After the index adjustment takes effect on June 13, the Shanghai and Shenzhen exchanges will then (depending on the announcement of the exchange) use this as a basis to adjust the scope of investment targets of the Shanghai-Shenzhen-Hong Kong Stock Connect.

During this period, similar to the MSCI index adjustment, some active funds still do not rule out taking certain arbitrage operations according to the results of the adjustment, but passive funds will choose to adjust their positions on the trading day before the effective date (that is, June 10) in order to minimize the tracking error. At that time, the trading of relevant stocks will be much larger than the usual "abnormal volume" situation, especially in late trading.

Recent trends in Hong Kong stocks and funds: the market is short-term consolidation, but the opportunities are greater than the risks; southward funds accelerate and overseas funds stabilize.

After the severe turmoil in Hong Kong stocks in mid-March, thanks to the signal of policy stability and the positive progress of regulatory cooperation between China and the United States, the market gradually stabilized and entered a state of narrow shock.We expect that although there will still be some twists and turns, the panic sell-off has basically ended and gradually entered the structural valuation repair phase.Some of the key variables that will affect market trends in the future include:

1) China-US regulatory cooperation and the international geo-situation; 2) the progress of domestic epidemic prevention and control and its impact on growth; 3) the strength and timing of the policy of stabilizing growth.On the whole, we believe that the opportunities for Hong Kong stocks still outweigh the risks, and the steady growth in the mainland (the National standing Committee will send the signal of reserve reduction) will help to gradually improve investors' expectations and confidence.

In terms of configuration, we thinkLow valuation and high dividend yieldAnd those with a larger range of previous adjustmentsHigh quality growth stockIt will still provide more protection for investors in the event of volatility. At the same time, the stable growth plate (partRaw materials) is expected to get policy support.Local finance and consumptionWith the improvement of the epidemic, it is also worthy of attention.

From a financial point of view, recently southward funds have returned to inflows, and overseas funds have also stabilized.

► southbound funds remain strong as a whole and have accelerated again recently.During the turmoil in Hong Kong stocks in mid-early March, southward funds continued to flow against the trend. In addition to the small outflow on March 17, during the month from the beginning of market volatility on February 23 to the stabilization and rebound of the market on March 23, southbound capital inflows maintained and continued to accelerate almost every day, with an overall inflow of HK $63.4 billion, accounting for 2/3 of the total inflow of HK $97.3 billion since the beginning of the year.

From the perspective of individual stocks, mainly into Tencent, Meituan-W, Li Ning Co. Ltd., Wuxi Biologics and Kuaishou Technology-W and other major declines in the new economy stocks. Southward funds weakened at the end of March, with a continuous net outflow from March 24 to March 30. However, after Ching Ming Festival's holiday in April, southward capital inflows accelerated again, with an average daily inflow of 660 million yuan.

► overseas funds have stabilized recently; a large outflow in the early period may be the main cause of volatility.In the context of the overall southward capital inflow, we believe that the early overseas capital outflow or the main cause of the market turmoil in mid-March, which is dominated by active capital outflow.

Recently, however, the outflow of overseas funds has eased thanks to domestic regulatory stability signals and some positive developments in regulatory cooperation between China and the United States. According to EPFR statistics, since late March (since March 24), overseas passive capital inflows into Hong Kong stocks have been US $2.83 billion, while overseas active funds have continued to outflow US $170 million slightly, so the overall inflow totaled US $2.66 billion.

Chart: adjustment rules for constituent stocks of the Hang Seng Composite Index

Chart: screening process and rules of Hong Kong Stock Exchange

Chart: tracking the size of ETF funds in Hang Seng Index, Hang Seng China Enterprises Index and Hang Seng Technology Index

Chart: although there has been an obvious correction in the Hong Kong stock market since mid-February, southward capital inflows have bucked the trend and the overall net inflow trend has been maintained.

Chart: overseas funds stabilized, and the early outflow may be the main cause of volatility.