The Dow Jones Industrial Average started with 12 stocks that really were industrial. The Hang Seng, Hong Kong’s equivalent blue-chip collection, included 33 because the bank of that name was formed in 1933. The history of the best-known indices is as relevant as knowing that brokers once met under a buttonwood tree or that Edward Lloyd’s coffee house used to be the place to insure a ship. But what the indices include matters very much today because of their effect on market mood. The Dow’s price-based composition makes it an anachronism. The Hang Seng, meanwhile, is alive and well, but it needs more stocks.
There is no ideal index size. Tokyo’s Topix has more than 1,500 constituents, while London’s FTSE 100 contains what it promises. This week China Mengniu Dairy replaced China Coal Energy in the now 50-strong Hang Seng. That reflects a shift in the mainland economy away from heavy industry towards consumers. But 50 stocks are not enough to reflect the city’s status as the starting point for overseas interest in China. Hong Kong is not the only way to invest there, but, while mainland inflows are tightly controlled, it is the easiest. Foreigners hold just 1.5 per cent of mainland A-shares, a proportion that could expand to all of 4 per cent by 2016, says Deutsche Bank.
The Hang Seng has expanded and changed before. In 2006 it included H shares – Hong Kong-listed Chinese companies – and grew to 38 stocks. In 2007 it moved to 50 stocks. It even launched a 100 index in 1998, only to drop it in 2001. Yet back then the Hang Seng was made up of local companies. Now more than two-thirds are China-based and most of the rest have extensive operations there. The Hang Seng has room to expand. The market capitalisation of the FTSE 100 is four-fifths of the capitalisation of the FTSE 350 but the Hang Seng accounts for just three-fifths of the 357-strong Hang Seng Composite. Benchmark indices can set market mood as much as they reflect it, which is why the Dow’s high profile is so irritating. A 100-strong Hang Seng wouldn’t stop the local obsession with its ups and downs, but it would be a far better market mirror.