Hang Seng Index Company: During the four-year election cycle in the United States, the performance of Hong Kong stocks is similar to that of US stocks

According to the financial news app Zhitong Finance, the Hang Seng Index Company stated in a blog post that it uses a method similar to the "Presidential Election Cycle Theory" to analyze the performance of US stocks and Hong Kong stocks (Hang Seng Index) since 1977 based on the four-year US election cycle. Over the past 48 years, both US stocks and Hong Kong stocks have shown some similar trends. Historically, in the first to fourth years, both US stocks and Hong Kong stocks have exhibited the same trend, with the best performance in the third year (the performance order for both markets is 3rd year > 1st year > 4th year > 2nd year). It can also be seen that in the fourth year, the average annual increase in Hong Kong stocks during the US election year is 14.3% (higher than the average increase of 12.5% over 47 complete years).

The Hang Seng Index Company pointed out that 2024 will be the largest election year in history. According to TIME, more than 60 countries/regions globally will hold presidential or legislative elections, involving an estimated population of 4 billion. The upcoming US presidential election on November 4th will be a global focus. Since 1977, US stocks and Hong Kong stocks have shown the best average performance in the year before the election. It is worth noting that during election years, when the incumbent president is from the Democratic Party, the average performance of both stock markets is relatively good. For investors seeking to measure the performance of Hong Kong blue-chip stocks and the potential revaluation of the Hong Kong stock market during the US election period, the Hang Seng Index ("HSI") will be an ideal choice for the Hong Kong stock market index.

Since 1977, the average performance of the Hang Seng Index in US election years and post-election years is +14% and +16% respectively.

In 2024, which is the largest election year in history, according to TIME's report, more than 60 countries/regions globally will hold presidential or legislative elections, involving an estimated population of 4 billion. Among them, the upcoming US presidential election on November 4th will be a global focus. The Hang Seng Index Company uses a method similar to the "Presidential Election Cycle Theory" to analyze the four-year US election cycle since 1977 (where the first to fourth years of a presidential term represent the post-election year, mid-term year, pre-election year, and election year) for US stocks (S&P 500) and Hong Kong stocks (Hang Seng Index) (see Figure 1). Over the past 48 years, both Republicans and Democrats have been elected as presidents for 24 years each. Interestingly, US stocks and Hong Kong stocks have shown some similar performance.

Note: In 1967, Yale Hirsch's "Presidential Election Cycle Theory" pointed out that the presidential cycle may have an impact on the market because the focus of the presidential election will shift towards improving the economy to enhance re-election opportunities The third year of the four-year presidential cycle has the highest stock market returns.

Figure 1: Annual performance of the US stock market and the Hong Kong stock market **

Source: Hang Seng Index Company; Wind Information

Data as of: July 5, 2024

Note: For the "post-election year" or "first year" (i.e. 1977, 1981, ..., 2021), although the newly elected president will take office on January 20, the annual performance is calculated from January 1 to December 31.

In terms of the average performance over years 1-4, both the US and Hong Kong stock markets show the same trend, with the best performance in the third year (the performance of both markets is: 3rd year > 1st year > 4th year > 2nd year) (Figure 2). It can also be seen that in the fourth year, the historical average increase of the Hong Kong stock market is 14.3% (higher than the average increase of 47 complete years at 12.5%). When divided by the terms of Democratic and Republican presidents, the average performance of the US and Hong Kong stock markets is better during the Democratic president's term, both about 5 percentage points higher than during the Republican president's term (Figure 3).

Figure 2: Historical average performance of the Hong Kong and US stock markets in the four-year presidential cycle (1977-2023)

Source: Hang Seng Index Company; Wind Information

Data as of: July 5, 2024

Figure 3: Historical average performance of the Hong Kong and US stock markets during the terms of Democratic and Republican presidents (1977-2023)

Source: Hang Seng Index Company; Wind Information

Data as of: July 5, 2024

It is worth noting that 2024 and 2025 are respectively election years and post-election years. Taking into account both the cycle and the president's factors, during the "US election year with a Democratic president in office" period, the historical average performance of the Hong Kong stock market rose by 22.7% (Figure 4). In 2024 (also an election year with a Democratic president in office), the Hong Kong stock market has risen by 4.4% year-to-date, and the market's expectations for the second half of the year are gradually turning optimistic For the annual period after the election (Year 1), historical data shows that under a Democratic president, the average performance of the Hong Kong stock market (+21%) and the U.S. stock market (+18%) is more than twice that during a Republican presidency (Figure 5). According to current predictions by The Economist (as of July 5th this year), the probability of a Democratic president being elected in 2025 is 25% (Figure 6).

For investors seeking to measure the performance of Hong Kong blue-chip stocks and the potential further revaluation of the Hong Kong stock market during the U.S. election period, the Hang Seng Index would be an ideal choice for the Hong Kong market index.

Figure 4: Average performance of the Hong Kong and U.S. stock markets in the fourth year of the four-year presidential cycle (election year)

Data Source: Hang Seng Index Company; Wind Information

Data as of: July 5, 2024

Figure 5: Average performance of the Hong Kong and U.S. stock markets in the first year of the four-year presidential cycle (post-election year)

Data Source: Hang Seng Index Company; Wind Information

Data as of: July 5, 2024

Figure 6: 2024 U.S. election forecast

Data Source: The Economist; Data as of: July 5, 2024

Hang Seng Index - Market Expectations Turning Optimistic in the Second Half of 2024

In 2024 (also an election year with a Democratic president in office), the Hong Kong stock market has risen by 4.4% year-to-date, and market expectations for the second half of 2024 are gradually turning optimistic. For investors looking to measure the performance of Hong Kong blue-chip stocks and the potential further revaluation of the Hong Kong stock market during the U.S. election period, the Hang Seng Index would be an ideal choice for the Hong Kong market index.

Launched on November 24, 1969, the Hang Seng Index is an important indicator of the performance of the Hong Kong stock market. Its constituent stocks are calculated using the free float-adjusted market capitalization weighting method, with individual stock weightings capped at 8% for non-foreign companies (4% for foreign companies). The target number of constituent stocks will gradually increase to 100, currently standing at 82 By industry weight, the top three industries in the Hang Seng Index are finance (33%), information technology (29%), and non-essential consumption (10%) (Figure 7). The combined weight of the top ten constituent stocks is 55% (Figure 8).

Figure 7: Weight and number of companies in the Hang Seng Index by industry weight

Source: Hang Seng Index Company; Data as of July 5, 2024

Figure 8: Top ten constituent stocks of the Hang Seng Index

Source: Hang Seng Index Company; Data as of July 5, 2024

Hang Seng Index - Outperforming the Market by 0.7 Percentage Points

From December 31, 2018, to July 5, 2024, the Hang Seng Index had a return of -31.1% (annualized return of -6.6%), while the market (represented by the Hang Seng Composite Index) had an annualized return of -4.7% (Figure 9).

Since the beginning of 2024, the return of the Hang Seng Index has been +4.4%, outperforming the market by 0.7 percentage points (Figure 10). The risk-adjusted return of the Hang Seng Index since the beginning of 2024 (annualized return / annualized volatility) is 0.52 times, outperforming the market by 0.45 times.

Figure 9: Index Performance - Hang Seng Index (HSI) vs. Hang Seng Composite Index (HSCI) (since 2019)

Source: Hang Seng Index Company; Data as of July 5, 2024

Figure 10: Index Performance - Hang Seng Index (HSI) vs. Hang Seng Composite Index (HSCI) (since 2024)

Information Source: Hang Seng Index Company; Data as of July 5, 2024