Hang Seng’s rebalancing tests investor tolerance for incremental risks

Hong Kong’s main benchmark is broadening its constituents to incorporate new economy companies. But by doing so, it is forcing investors to take on more expensive stocks and, potentially, accept greater risks.

In early March 2021, the Hang Seng Index HSI outlined a policy framework to expand constituent membership for the 50-year-old index. Starting in May, Hong Kong’s main trading benchmark will begin incrementally adding new names, reaching 80 stocks by 2022, with the intention to eventually represent 100 companies from its current number of 52.

China’s new economy and technology stocks will account for the bulk of the addition. The announcement follows a month-long consultation with market participants, many arguing that refreshing the index was needed to better reflect Hong Kong’s evolving capital market ambitions.

But with tens of billions of dollars tracking the HSI, passive investors...

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