Global investors are increasingly looking to Asian equities for portfolio diversification, growth and even income. But, while Asia is one word, it’s a myriad of dynamic economies, and understanding the market landscape can be difficult for new investors.
This is where Asia stock indexes can help.
What is an index?
One of the easiest ways to track the health of markets in a specific region (like Asia) is by following the performance of a market index or various indexes (plural can also be written as indices).
An index uses a composite number to represent the overall performance of a group of stocks. The stocks that make up a particular index are called constituents and they all have similar characteristics – usually size or market sector.
It’s important to remember that the performance of most indexes is weighted. This means the largest stock in an index will have the largest impact on the movement of the index. Smaller stocks will have less influence.
The method an index uses for its weighting calculation can vary. Most commonly, weightings are based on market cap or share price.
Some indexes do weight each constituent stock equally, these are called equal-weighted indexes.
What are indexes used for?
Day-to-day, indexes will move up and down or even remain steady. Major negative markets events will often see steep falls, while triggers such as positive economic news in a region might see an index surge on the back of investor confidence.
Checking an index can provide investors with a broad overview of the performance of a particular market or sector represented by the index. Major indexes can also act as economic barometers.
Day-to-day, indexes will move up and down, but perhaps the greatest insight to be gained from an index lies in its long-term trend.
In the investment management industry indexes are commonly used as benchmarks to measure the performance of actively-managed investment products and as the framework in which passive index funds are developed.
Indexes can also be traded using derivatives. In this case investors will try to ‘bet’ on the future direction of the index.
So, what are the major Asia stock indexes?
While you’ve probably heard of major U.S. indexes such as the S&P 500, Nasdaq Composite and the Dow Jones Industrial Average, you might be wondering, what are the major stock market indexes in Asia?
The major Asia stock indexes are; SSE Composite Index, The SZSE Component Index, Hang Seng Index, Nikkei 225, Nifty 50, BSE Sensex, Korea Composite Stock Price Index, Straits Times Index.
Don’t be confused! Here’s an overview of each.
SSE Composite Index (China)
SSE is short for Shanghai Stock Exchange, which is the largest exchange on China’s mainland. The SSE Composite Index is a representation of price trends of all stocks (more than 1500) that are listed on the Shanghai Stock Exchange, both A Shares and B Shares.
The SSE Composite (along with all other SSE indexes) is weighted by market cap and is calculated using what’s known as the Paasche Price Index formula. This means its composite value is based on a base period on a specific base day. December 19, 1990, is the base day and the base period is the total market cap of stocks on that day. The SEE Composite’s base value is 100.
You’ll often see or hear the SSE quoted in media reports as the “Shanghai Composite”.
SZSE Component Index (China)
SZSE is short for Shenzhen Stock Exchange and this index is usually referred to as the Shenzhen Component Index.
The index comprises of the top 500 stocks on the Shenzhen Stock Exchange, ranked using a formula which takes into account market cap and liquidity. The SEE Composite value is also calculated using the Paasche Price Index formula. Its base day is July 20, 1994 with a base value of 1000.
The index captures around 70% of the total market cap of the Shenzhen Stock Exchange.
The Shenzhen Stock Exchange and the Shanghai Stock Exchange are the only two stock exchanges in mainland China. They are both very useful in gauging investor sentiment surrounding Chinese equities and China’s economy.
Hang Seng Index (Hong Kong)
The Hang Seng tracks the largest 50 stocks on the Hong Kong Stock Exchange. Those stocks account for over 60% of the exchange’s entire market cap.
The index is a bellwether Asia stock index. It is used as a key measure to gauge the performance of both the Hong Kong economy and also mainland China’s economy as there are many Chinese companies listed on the Hong Kong Stock Exchange.
The Hang Seng is another market cap-weighted index but it is free-float adjusted.
A free-float adjusted market cap means the market cap of each stock in the index is calculated by multiplying stock price with only the number of shares available to be traded (excluding those held by investors and not for sale). This is opposed to a standard market cap calculation which would value the total number of shares – both available to trade and those held by investors.
In 2020 some significant changes are being made to the Hang Seng index. You can read about the changes in this Asia Markets article.
Nikkei 225 (Japan)
The Nikkei 225 is Japan’s main stock market index. It is usually referred to as The Nikkei.
The index tracks the top 225 stocks on the Tokyo Stock Exchange. It is a price-weighted index, so the companies with the highest share prices are afforded a bigger weight in the index. Calculations are made at five-second intervals during the hours the Tokyo Stock Exchange is open and are based on a wighted price average formula.
There are various well-known global companies in the Nikkei including, Panasonic, Mitsubishi, Toyota, Honda, Japan Post and Rakuten. For investors, it’s a very interesting index to watch.
Japanese business newspaper, The Nikkei manages the index, hence its name. The newspaper is the most read financial newspaper in the world, with a circulation of over 3 million editions daily.
Nifty 50 (India)
The Nifty 50 is one of two major indexes in India, covering the National Stock Exchange of India (NSE).
It tracks the behaviour of 50 of the NSE’s largest and most liquid companies. The 50 constituent stocks of the Nifty 50 have generally equated to around 65% of the entire NSE market cap in recent years.
14 sectors of the Indian economy are represented in the Nifty 50, so it is a very useful barometer of the Indian economy and Indian stocks.
The index is free float market cap-weighted and calculated using a base value set a 1000 on November 3, 1995.
What’s the name all about?
Nifty represents a mix of the words national and fifty. The term Nifty Fifty was also used in reference to a group of 50 high-growth stocks in the U.S. in the 1960’s and 1970’s. This can often be a point of confusion when investors come across the Nifty 50 index.
BSE Sensex (India)
The BSE Sensex is the other major index in India. It tracks the 30 largest and most liquid stocks on India’s other major exchange – the Bombay Stock Exchange (BSE). The BSE is the oldest stock exchange in the world and is similar in size to the NSE.
Like the Nifty 50, the BSE Sensex is also free float market-cap wighted. It is calculated using a base value of 100 on April 1, 1979.
It is another key barometer for Indian stocks and the economy and is often quoted alongside the Nifty 50 in the financial press.
Korea Composite Stock Price Index (South Korea)
The Korea Composite Stock Price Index is commonly referred to as the KOSPI. It is an index comprising all common shares traded on the Korea Exchange and is market cap-weighted.
The KOSPI is the main way to measure the performance of all the stocks on the Korea Exchange, but there are various other KOSPI indexes that are very common.
One of them is the KOSPI 200. It covers the 200 biggest stocks within the Korea Composite Stock Price Index and is also market cap-wighted. At time of writing, consumer electronics and semiconductor manufacturing giant Samsung Electronics is the biggest stock in the KOSPI 200.
Straits Times Index (Singapore)
The performance of the top 30 companies listed on the Singapore Exchange is tracked by the Straits Times Index. The index is the most prominent benchmark for Singapore stocks.
The Straits Times Index is market cap-weighted and free float adjusted and stocks are also screened for liquidity. It is a great way to get an overview of the performance of stocks listed in Singapore.
Like the Nikkei, the name of this index reflects a newspaper – The Straits Times – which was the original operator of the index when it began in 1966.
Want to know more or have a suggestion about the major Asia stock indexes? Leave a comment below.