Best brokers for trading Hong Kong (Hang Seng Index)

What is the Hang Seng Index?

The Hong Kong Hang Seng Index is the benchmark stock market index of the territory. The index has 50 constituents, including a host of HK-based companies and Chinese firms. The index is maintained by Hang Seng Indexes Company, a private company owned by the Hang Seng bank.

Started in 1969, the index has a long and interesting history. Manias, bubbles, and severe corrections are some of the hallmarks of the index. In 2008, for example, the index lost almost two-thirds of its value.

Currently, some of the biggest companies in the world are included in this index, including HSBC, Tencent, and AIA. The recent listing of Alibaba could see its inclusion into the index soon.

Source: Hang Seng 

Can you trade the Hang Seng Index?

Yes, you can. There are multiple financial products derived from the underlying Hang Seng Index that you can trade with, including:

• Index Futures (HKEX)
• Index Options (HKEX)
• Exchange-Traded Funds (GMG Guide on ETFs)
• Investment Funds
• Spread trading
• CFDs

Read the GMG Guide on Index Trading.

The biggest ETF based on the HS Index is the HSI ETF (ticker: 2833 HK). This ETF is gaining popularity because of the ease of trading, unlike futures or options where there are rollover costs and expiry dates. The currency of trade is the Hong Kong Dollar (HKD).

On index futures, they usually expire on March, June, September, and December.

What is the attraction of HK Hang Seng Index?

One of the most keenly traded indices in Asia is the Hang Seng Index. The index is attractive to investors and traders alike because:

• HSI stocks combines both local and regional exposure, including the exposure to China
• HSI offers good liquidity as some of these stocks are huge (e.g. HSBC, Tencent, and and AIA)
• HSI offers indirect exposure to leading the financial sector and the Chinese economy.

As noted above, many Chinese firms, including State-Owned Enterprises SOEs, are listed in HK. Many of them are financials and telco like CCB, Ping An, ICBC, and China Mobile.

Historically, HSI is a very volatile index which offers scope for short-term trading. Hence its popularity with traders.

What drives the Hang Seng Index?

Stock markets are often driven by a wide variety of factors. For the Hong Kong stock market, the number one factor is global growth. This is because the market is dependent on trade, goods flow, and capital movements. A fall in global trade will hit the market hard.

Other important factors for HKI include:

• Earning factors (e.g., profitability and earnings momentum)
• Technical factors (e.g., new highs or lows)
• Political factors (e.g., street protests)
• Monetary factors (e.g., the peg against the USD)

The latter has been an over-riding factor of late due to the non-stop protests throughout the summer and autumn. The region is falling into a technical recession.

A 7-Point Guide to trading Asian stock indices

Trading Asian stock indices has always a lure for many aspiring traders. In the past, many western observers referred to Japan/HK as the 'Far East'. But in these days of instant electronic trading, investing in Asian markets has never been easier. But there are some things you may need to watch out for.

1. Understand that 'Asia' is a very big continent. You have to know which countries you want to invest in. At the minimum, know whether the Asian country you are interested in is a developed, developing or a frontier economy. There are more than 35 countries in Asia, stretching from Japan to Pakistan. So there are a lot of cycles overlapping one another. Other things to watch out for include:
   • Economic cycles
   • Currency trends (managed, pegged, or free float?) - very important
   • Political trends and elections
   • Sector niche
2. Understand your requirements for trading Asian stocks. Are you in just to get a 'kick'? Or do you invest for the long term? Are dividends important? This will dictate what you invest in and how you do it.
3. Anticipate the market catalysts for buying in (or selling out). In many Asian markets, an election can have a massive positive impact on the local stock market. Modi in India is one example. Shinzo Abe of Japan is another. They bring in new policies that often rejuvenate the economy (at least for a while).
4. Research what type of exposure available. Not all Asian markets are available to foreign investors. China used to be a totally closed market but is now gradually opening up. Still, there is a limit. Other countries are more open, such as Singapore and Hong Kong. Therefore, if you are preparing to invest understand how you wish to carry out your transactions. Can you invest locally or through a fund? Can you buy Asian stocks from where you are?
5. Identify the sector niche. Not all countries can be competitive in every sector. For Singapore/HK, the bigger sectors are property, banks, insurance etc. For Indonesia and Australia, resource stocks are better. In Korea, tech/chip stocks are worth watching. So before you invest with MSCI country ETFs or indices, you have to know what the constituents are. Check and see if these stocks are what you want to hold.
6. Examine the risk and reward. Asian markets are very attractive to many investors simply because of the higher growth rates there. China is growing at 5-6%; so is India. Countries like Vietnam, Philippines, Indonesia all showing promising trends one way or another. However, not all is rosy. You can lose serious amount of money if you overpay for securities. So are you buying blue-chip Asian stocks or are you buying growth stocks? Different type of stocks carry different kind of risks.
7. Commit capital but go slow initially. Especially if you're unsure what or how to trade Asian markets. Drip feed capital into Asian funds or ETFs just to experience the pricing behaviour.