Hong Kong as a stock market has always had very traditional bent, dominated by banks and property developers. But after attracting a string of secondary listings over the past few months, Hong Kong has a new focus: technology.
Hang Seng, which operates the city's benchmark index, on Monday introduced a new index to allow investors to monitor companies such as Alibaba Group Holding (BABA) , Tencent Holdings (TCEHY), Xioami (XIACY) and JD.com (JD) . It hopes the index will act as a Nasdaq of Asia, of course dominated by China-focused companies.
The Hang Seng Tech Index began operation on Monday, tracking the 30-largest tech companies listed in Hong Kong. Since New York-listed Alibaba floated a secondary offering in the city last November, other U.S.-listed companies such as gamemaker NetEase (NTES) and e-commerce site JD.com have followed suit. Should the pressure from U.S. politicians on U.S.-listed Chinese companies intensify, the Chinese companies may abandon their American listings altogether in favor of the Hong Kong market.
Last week, Alibaba's digital-payments affiliate Ant Financial announced plans to go public with a dual initial public offering in Hong Kong and Shanghai. It will not initially list in the United States. The company is targeting a valuation of US$200 billion, making it the world's largest "unicorn," or unlisted tech startup.
Tech is now the second-largest component of the Hong Kong market. Financials make up 31.1% of the Hang Seng Composite Index, which covers 95% of the Hong Kong market. But tech, at 23.6%, is the second-biggest sector despite only containing 37 listings, ahead of property companies (11.8%) and consumer discretionary (8.6%), the latter a category that contains Macau casino operators.
Asia-focused banks such as HSBC (HSBC) and insurers such as AIA Group (AAIGF) have been the Hong Kong market's dominant force. But they are old economy, and old hat. Tencent, which makes mobile video games such as the wildly popular Honor of Kings but also operates the omnipresent app WeChat, is now the biggest stock in Hong Kong by market cap, at US$651 billion. That gives it an 11.3% weighting in the broad Hang Seng, double the 5.6% for second-largest AIA.
The new index will be weighted by free float market cap, but also capped at a maximum weighting of 8%. That means Alibaba, Tencent, grocery-delivery and group-buying specialists Meituan Dianping (MPNGF) , mobile-phone maker Xiaomi and optical-lens maker Sunny Optical (SNPTF) hit the max cap. Constituents will be given fast entry if they conduct a Hong Kong listing.
The top-10 listings are rounded out by Chinese chipmaker SMIC (SMICY) (which is withdrawing its U.S. listing after a secondary listing in Shanghai), Alibaba's online-doctor company Ali Health HK:0241, Alibaba e-commerce rival JD.com, the Chinese software maker Kingdee International (KGDEF) , and Ping An's online-health clinic Ping An Healthcare and Technology Co. (PIAHY).
There have not yet been any ETFs announced that will track the Hang Seng Tech Index. But that's surely only a matter of time. Any U.S.-listed index trackers following the Hang Seng Tech Index will provide an easy access to exposure to China's technology sector, which can be hard for international investors to tap.
According to Hang Seng, back-testing shows the Hang Seng Tech Index would have produced a gain of 36.2% in 2019, and 35.3% in the first half of 2020 alone.
Hong Kong stocks are flagging on Monday, with the Hang Seng Index down 0.4% at the close, as the city introduces its strictest measures to date against the coronavirus. Hong Kong has resisted a total lockdown. But the city is now facing an alarming "third wave" of infection, with a record daily rate of 140 new cases on Monday, many of them with no obvious source of infection. Hong Kong did well to avoid a pandemic disaster when the virus broke out across the border in Wuhan. It has now seen 2,633 infections as of Monday.
Starting Wednesday, all restaurants will be closed for dining for one week, restricted only to take-out. Hong Kongers will be required to wear facemasks while outdoors, and only allowed to go around in a "group" of two people. Citizens are already required to wear masks in indoor public spaces such as shopping malls, and on public transportation. There's been no special dispensation for exercise, meaning we'll all have to wear masks all the time when away from home. Civil servants are working from home, and private-sector companies have been encouraged to allow the same.
The Hong Kong stock market is well ahead of the game. It closed its physical trading floor in 2017, going all-online. The Hang Seng Tech Index makes perfect sense in a world that's heading that way, anyway.