Goldman Sachs has released a research report following the latest quarterly review announcement from Hang Seng Indexes Company. Hua Hong Grace (01347) and Weichai Power (02338) will be added to the Hang Seng Index, increasing the constituent count from 93 to 95, with the changes taking effect after the market close on September 4. The Hang Seng China Enterprises Index will see no changes to its constituents, while the Hang Seng Composite Index will welcome 61 new stocks and remove 15.

The investment bank estimates that this index adjustment will generate total two-way passive fund flows exceeding $7.2 billion. Based on benchmark index weight changes and free-float factor adjustments, the simulated index market capitalizations for the Hang Seng Index, HSCEI, and Hang Seng Tech Index are projected to shift by +1.6%, +1.5%, and -2.6%, respectively.

At the sector level, technology hardware and semiconductors, software and services, as well as internet and media are expected to attract the largest passive fund inflows, with amounts of approximately $870 million, $190-230 million, and $190-230 million, respectively. Conversely, banking, utilities, and consumer retail are likely to experience the most significant outflows, estimated at around $800 million, $100-140 million, and $100-140 million, respectively.

Goldman Sachs anticipates that the six stocks with the highest net passive inflows will be Trip.com Group (09961), Lenovo Group (00992) due to an increased free-float factor, Hua Hong Grace and Weichai Power upon their inclusion in the Hang Seng Index, as well as Tencent (00700) and SMIC (00981) driven by simulated weight increases. Potential inflow amounts range from $160 million to $470 million. On the other side, stocks likely to see notable passive outflows include HSBC Holdings (00005) and China Construction Bank (00939), with potential outflows ranging from $100 million to $520 million.

The report notes that stocks newly added to the Hang Seng Index and Hang Seng Tech Index experienced declines relative to benchmark indices and removed stocks before the announcement, consistent with recent momentum factors. Historically, stocks added to the Hang Seng Index tend to show modest outperformance after the announcement, though this effect typically reverses around the effective date. For the Tech Index and Composite Index, added stocks usually sustain their outperformance until the effective date.

Furthermore, constituent changes in the Hang Seng Composite Index will affect eligibility for Stock Connect. According to Goldman Sachs' historical data, northbound investor holdings typically rise by an average of 2 percentage points in the first two days after inclusion in Stock Connect, followed by a further 9 percentage point increase over three months. Stock prices generally climb before inclusion, dip briefly afterward, and then stabilize.