Hang Seng Index (HSI)

The Hang Seng Index (HSI) is the headline act of the Hong Kong stock market. Think of it as Hong Kong's equivalent of the American S&P 500 or the UK's FTSE 100. Launched in 1969, this index tracks the performance of the largest and most actively traded companies listed on the Stock Exchange of Hong Kong (SEHK). Compiled and managed by Hang Seng Indexes Company Limited (a subsidiary of Hang Seng Bank), the HSI is a free-float adjusted market capitalization-weighted index. This fancy phrase simply means that bigger companies with more shares available to the public have a bigger impact on the index's movement. Because many of its constituent companies have deep business roots in mainland China, the HSI is not just a barometer for Hong Kong's economy; it's also a widely watched indicator of international investor sentiment towards China. For investors, it's a window into one of Asia's most dynamic financial hubs.

Getting into the HSI is like being invited to an exclusive club. A company must first be a blue-chip powerhouse listed on the SEHK. The selection process considers a company's market capitalization (its total value) and its turnover (how frequently its shares are traded). The goal is to ensure the index is composed of the most significant and liquid stocks on the exchange. To maintain a balanced view of the market, the constituent stocks are grouped into four sectors:

• Finance
• Utilities
• Properties
• Commerce & Industry

A committee meets quarterly to review the list, adding new champions and removing companies that no longer meet the criteria, ensuring the HSI remains a relevant snapshot of the market's leaders.

The HSI's weighting system is designed for fairness. A company's influence on the index is determined by its free-float market capitalization. Free-float refers only to the shares available for public trading, excluding those held by governments, insiders, or other major corporations. This gives a more realistic picture of a company's weight in the market. To prevent a few giants (like Tencent or Alibaba) from having too much sway and turning the index into a one-company show, the HSI employs a capping mechanism. No single company's weighting in the index can exceed a certain percentage (currently 8%). This cap ensures diversification and means that a bad day for one behemoth won't single-handedly drag the entire index down.

For a value investing practitioner, the HSI is more than just a number on a screen; it's a powerful economic mood ring. Its movements often reflect investor confidence in Hong Kong's open economy. But its story doesn't end there. The index is heavily populated with companies that have significant operations in or are based in mainland China. These include:

• H-Shares: Companies incorporated in mainland China but listed in Hong Kong.
• Red Chips: Companies based in mainland China but incorporated internationally (like in the Cayman Islands) and listed in Hong Kong.

Because of this, a rising or falling HSI is often interpreted as a proxy for the health of the Chinese economy and the appeal of its biggest corporations to global capital.

A true value investor, in the spirit of Warren Buffett, wouldn't simply buy an index fund that tracks the HSI and call it a day. Instead, they use the index as a high-quality hunting ground. When the HSI as a whole is trading at a low price-to-earnings (P/E) ratio, it can be a sign that the entire market is on sale. This is a signal to roll up your sleeves and start digging for individual bargains. The HSI's constituent list is a pre-vetted roster of major companies, making it an excellent starting point to find “wonderful companies at a fair price.” However, be mindful of concentration. The index is often heavily weighted towards the finance and technology sectors. A value investor must analyze the index's composition to avoid being overexposed to a single industry. The goal isn't to buy the whole haystack but to find the needle—that one great business, perhaps a “cigar butt” stock temporarily beaten down by market pessimism, that offers exceptional value.

The HSI was officially launched on November 24, 1969, but its base is retroactive. It was set to a value of 100 points as of July 31, 1964, to provide a stable benchmark. Created by the then-chairman of Hang Seng Bank, Ho Sin Hang, it was envisioned as the “Dow Jones of Hong Kong.” Throughout its history, the HSI has been on a wild ride, reflecting Hong Kong's own dramatic economic journey. It has weathered spectacular booms and gut-wrenching busts, including the 1987 stock market crash, the 1997 Asian Financial Crisis, and the 2008 Global Financial Crisis. Its volatile history serves as a powerful reminder of both the risks and immense opportunities present in this pivotal global market.