In the dynamic world of global markets, the Hong Kong market, specifically the Hang Seng Index, stands out as a significant player. Home to major Chinese companies such as Alibaba, it has witnessed remarkable highs and lows over the years. In this blog post, we’ll delve into the recent performance of the Hong Kong market, highlighting the potential pitfalls of relying solely on blind indexing.
The Rollercoaster Ride of the Hang Seng Index
The Hang Seng Index, a barometer of the Hong Kong market, has experienced notable fluctuations. Starting near 32,000 and plummeting to 14,600 by September 2022, it then surged to 22,000—a rapid 50% bounce—only to retreat once again to 16,000. This rollercoaster journey reflects a significant 50% drawdown from its peak, illustrating the challenges faced by investors.
Decades of Stagnation
Looking back, the current index level of around 16,000 mirrors the levels seen in 1997. This stagnation over 26 years challenges the conventional wisdom that indexing always yields positive returns. Despite two and a half decades of growth in China and Hong Kong, the Hang Seng Index has failed to deliver substantial gains, raising questions about blind reliance on indexing.
Rethinking Blind Indexing
While indexing has proven effective in American and Indian markets, the Hong Kong scenario serves as a cautionary tale. The notion that blind indexing guarantees long-term success is challenged by the stagnation witnessed over decades. Investors must reconsider whether adopting an exclusive indexing strategy is prudent, especially considering the cyclical nature of markets.
Diversification is Key
The Hong Kong Index’s last decade serves as a stark reminder that market conditions can change, and blindly following a single investment strategy may lead to significant losses. Diversification emerges as a crucial strategy, encompassing different types of allocations within markets and across various asset classes. This approach mitigates risk and enhances resilience against unforeseen market downturns.
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