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A Beginner's Guide to Trading the HK50

   

hk50-trading

If you’ve never traded the HK50, you might be missing out on a great opportunity to capitalize on economic growth in a promising foreign market.

Although the Hong Kong Stock Exchange is the third-largest stock exchange in Asia, and the sixth largest in the world, it often gets overshadowed by the Chinese and Japanese markets—not to mention the markets in New York and London. But seasoned investors are aware of the trading opportunities available in Hong Kong, especially with the HK50.

The Hang Seng Index, or HK50, tracks the 50 largest and most liquid companies on the Hong Kong Stock Exchange (HKSE), offering a reliable reflection of the economic strength of Hong Kong as well as China.

Here’s an overview of the HK50, including a primer on how to approach trades in this market.

Understanding the HK50

The HK50 is a massive index relative to the overall size of the Hong Kong Stock Exchange, accounting for roughly 65% of the exchange’s total market capitalization. The majority of the index is comprised of financial, utility, industrial, and property companies.

It is comparable in design to the S&P 500, which brings together 500 of the largest U.S. companies to provide a reliable barometer of the American economy at any given moment. In a similar way, the performance of the HK50 is regularly used to take a quick temperature check of the Hong Kong economy as well as China’s economy. For international investors, this can be helpful when trying to identify trade opportunities, whether they’re looking at forex pairings or other investments in Asian stocks.

In fact, due to the capital restrictions of the Chinese stock market, the HKSE and, in particular, the HK50—which are free of those restrictions—can actually provide a more accurate portrait of the Chinese economy than the Chinese exchange itself. Even if you aren’t specifically interested in investing in the HK50, it’s useful to become familiar with its performance over time, what its price movement says about the Hong Kong economy in particular, and how it affects Asian markets in general.

Why Should Traders Want to Invest in This Market?

The HK50 has enjoyed a long history of strong performance, growing in value by more than 20,000% since its inception in 1964. Although the trading hours for the HK50 aren’t ideal if you’re based in London, New York, or another Western city, the HK50 does still enjoy global popularity among investors thanks to its strong growth over time and its optimistic outlook for the future.

Here’s a look at a five-year chart for the HK50, underscoring the dramatic long-term gains of this fund—especially in contrast to similar indices around the world:

Screen Shot 2020-11-20 at 8.13.07 AM

Since it’s a large but still emerging market, traders can enjoy high volatility that creates profit opportunities for well-researched investments. Additionally, many HK50 investors use exchange-traded funds (ETFs) as a simple way to capitalize on the overall growth of the Hong Kong and Chinese economies.

Diverse Investment Options

The HK50 offers multiple options for investing in an emerging financial market, ranging from day-trading opportunities to long-term investment vehicles. While Hong Kong has risen in popularity as a destination for forex investments, for example, ETFs are a popular method of investing in this foreign market, especially for traders trying to overcome a time zone difference.

American depository receipts (ADRs) and contracts for difference (CFDs) are also common vehicles for capitalizing on live trading opportunities. While CFD trading brings an additional degree of risk to international investments that already pose a greater liability than domestic investments, experienced investors may see this increased risk as well worth the potential payoff.

Other Advantages to Trading the HK50

The HK50’s global popularity can be credited to a number of advantages that come with this index. In addition to the diverse options offered by the HK50, traders also appreciate that the index has a strong performance history, making it a more stable index option that appeals to both novice and experienced traders.

Dividend earnings are also higher with the HK50 than with other indices, and it gives traders a financial foothold in a fast-growing economic region—while also insulating traders from the economic uncertainty that comes with Asian indices tied to India and other developing and volatile nations. As a modernized economy that is home to a number of global businesses, Hong Kong is a logical choice for traders looking to capitalize on gains in the overall global economy. 

It’s worth noting that many multinational corporations have established headquarters and operations in Hong Kong in part to insulate those businesses against recessions affecting the United States and other parts of the world. In a similar way, traders can use investments into the HK50 to diversify their risk profile while protecting their profit potential.

Disadvantages to Trading the HK50

While the HK50 is a strong, stable index that offers a degree of reliability to traders, it also lacks the market volatility that gives traders strong, swift profit opportunities. Indices based more heavily in the Indian and mainland China markets, for example, have historically seen better returns as the markets represented by those indices develop and grow.

Related to that reduced volatility is the fact that the HK50 is benchmarked at a fixed rate to the U.S. dollar. This means that a decline in the value of the U.S. dollar can lead to a depreciation of the value of HK50 holdings, which may not be desired by traders looking to diversify beyond their U.S. holdings.

In the chart below, notice how the HK50’s value has dropped and displayed greater volatility since the start of 2020. While this period of time portrayed is greatly affected by the development of the COVID-19 pandemic, it is notable how dramatically the index drops in value over the course of March, when the pandemic reached the United States in full force and brought that country’s economy to a halt:

Screen Shot 2020-11-20 at 8.15.32 AM

Keep in mind, too, that even with safer, diversified HK50 investments such as ETFs, trading in overseas markets can carry greater risk than domestic investments. With the HK50, this is largely due to the unreliable political track record in China as well as the country’s history of intervening in market-based activities.

Despite these risks, the volatility and growth potential of the HK50 are attractive to many investors.

Conclusion

If you’re unfamiliar with the HK50 but interested in foreign investments, especially in Asia, it’s worth taking time to get a better understanding of this index, including the investment options it offers and the context it can provide in evaluating the Chinese and Hong Kong economies.

Given the high-risk, high-reward nature of the HK50, it’s wise to do your homework before opening positions in this market.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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