Hang Seng Index (HSI): Definition, History, and Key Statistics

August 24, 2024 4 min read Finance Stock Markets Hang Seng Index HSI Stock Market Hong Kong Stock Exchange Market Indicator

A comprehensive overview of the Hang Seng Index (HSI), covering its definition, historical context, importance, and key statistics. Discover how the HSI serves as a primary indicator of stock market performance in Hong Kong.

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The Hang Seng Index (HSI), launched in 1969, serves as a market-capitalization-weighted index that tracks the performance of the largest and most liquid companies traded on the Hong Kong Stock Exchange (HKEX). Frequently referred to as the barometer of Hong Kong’s stock market, the HSI is a critical indicator of the health and direction of the Hong Kong financial markets.

Historical Context

Inception and Early Years

The HSI was developed by Hang Seng Bank and officially introduced on November 24, 1969. Its base value was set at 100 points, reflecting the capitalization of the 33 constituent companies included in the index at that time.

Evolution and Adaptations

Over decades, the HSI has undergone various changes and adaptations to better reflect the economic landscape of Hong Kong. Notably, its composition has expanded and diversified to include sectors such as technology and finance, mirroring the broader shifts in Hong Kong’s economy.

Milestones and Key Moments

1987 Black Monday: The HSI suffered a severe plunge, highlighting its volatility during global market downturns.
Handover of Hong Kong (1997): The index experienced significant fluctuations around the period of Hong Kong’s transfer of sovereignty from the UK to China.
Global Financial Crisis (2008): The HSI, like many global indices, faced a steep decline, showcasing its sensitivity to global economic conditions.

Importance and Usage

Indicator of Market Performance

The HSI is recognized as a primary indicator of the overall performance and sentiment of the Hong Kong stock market. Investors and analysts use it to gauge market trends, economic health, and for benchmarking purposes.

Investment Tool

The HSI also serves as a basis for a variety of financial products such as index funds, exchange-traded funds (ETFs), and derivatives, making it a crucial tool for both passive and active investment strategies.

Key Components and Calculations

Constituent Stocks

As of the latest update, the HSI comprises 58 constituent stocks, representing about 65% of the total market capitalization on the HKEX. These companies are selected based on their market value, turnover rankings, and sector representation.

Weighting Methodology

The HSI employs a free-float-adjusted market capitalization weighting method. This means that only the shares available to the public (i.e., excluding those held by company insiders) are considered in the calculation of the index.

Calculation Formula

The HSI level is calculated using the following formula:

\text{HSI} = \frac{\sum_{i=1}^{n} P_i \times Q_i \times FAF_i \times CF_i}{D}

where:

\( P_i \) = Price of the i-th constituent stock
\( Q_i \) = Number of shares of the i-th constituent stock
\( FAF_i \) = Free Float Adjusted Factor of the i-th constituent stock
\( CF_i \) = Capping Factor of the i-th constituent stock
\( D \) = Divisor

Comparative Analysis

The Hang Seng Index can be compared to other major stock indices such as the S&P 500, FTSE 100, or Nikkei 225. While each index serves to reflect the performance of its respective market, variations in weighting methodologies, constituent selection, and economic environment lead to different behavior and applications.

Hang Seng China Enterprises Index (HSCEI): Focuses on Chinese companies listed in Hong Kong.
Hang Seng Tech Index: Tracks the performance of the largest technology companies listed on the HKEX.

FAQs

What companies are included in the HSI?

The HSI includes major companies such as Tencent Holdings, HSBC Holdings, and China Mobile, representing a broad spectrum of sectors like finance, technology, and utilities.

How often is the HSI updated?

The constituent stocks of the HSI are reviewed quarterly to ensure they meet the criteria for inclusion based on recent market developments.

Is the HSI a good indicator for investment decisions?

While the HSI provides valuable insights into market trends, investors should use it in conjunction with other analyses and tools to make well-informed investment decisions.

Summary

The Hang Seng Index (HSI) is an essential tool for tracking the performance of the Hong Kong stock market. Since its inception in 1969, it has evolved to become a comprehensive benchmark reflecting the economic dynamism of Hong Kong. Investors and analysts rely on the HSI for market insights, investment strategies, and economic forecasting. By understanding its components, historical context, and methodology, one can appreciate the HSI’s role in global finance.

References

“Hang Seng Index.” Hang Seng Indexes Company Limited. Website.
“The Handbook of World Stock, Derivative, and Commodity Exchanges.” Mondo Visione.
“Financial Markets and Institutions.” Frederic S. Mishkin.