Is the Hang Seng Index’s blue dye a blessing or a curse?

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Is the Hang Seng Index’s blue dye a blessing or a curse?
Research by the Post shows that 12 of the 15 stocks that were added to the Hang Seng Index fell in the three months after their inclusion, and 60 per cent of them have not recovered.

by Laura He

PUBLISHED : Tuesday, 04 April, 2017, 9:03am
UPDATED : Tuesday, 04 April, 2017, 10:57pm

Being chosen as a Hang Seng Index (HSI) component stock, or being “dyed blue” as the local saying goes, might reasonably be considered a blessing for the share price of the chosen one, because passively managed funds that track the blue chip index have to add the stock to their holdings.

The data shows quite the opposite. An analysis of stock performance over the past seven years shows that 12 of the 15 “dyed blue” stocks declined three months after joining the Hang Seng index, while 60 per cent still haven’t recovered to this day.

“Many blue chips soared to excessively high levels before joining the index as speculators bought the stocks with the hope of quickly selling them to index-tracking funds,” said Ben Kwong Man-bun, head of research and executive director at KGI Securities.

Realignment of the weightings, or “rebalancing” by index funds, usually takes place one day prior to the implementation of an index reshuffle.

When the speculative bubble eventually bursts, it usually takes a long time for the stock to recover.

More details in http://www.scmp.com/business/companies/a...g-or-curse
Specuvestor: Asset - Business - Structure.
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