Recent Updates to HKSI Paper 8 Version 3.4 Manual– Securities

The following updates are examinable from 1 April 2023

TOPIC 1 – OVERVIEW OF SECURITIES INVESTMENTS

• Dates and data updated for the Main Board, GEM, the debt market, global securities market and Hong Kong market indices
• Material added relating to market sentiment:

Market Sentiment

• Market sentiment generally refers to the collective views of market participants on asset prices
• The sentiment can be collectively positive or negative
• Positive market sentiment in China stocks could arise from an expectation that China’s economy will grow and exceed US GDP
• Negative market sentiment in China stocks could be linked to political instability, social unrest, war, uncertain government policies, weak global economic environments and/or market crashes

TOPIC 2 – THE STOCK EXCHANGE OF HONG KONG: PRIMARY AND SECONDARY MARKETS

• Data updated relating to initial public offerings and prospectus publication
• Material added relating to special purpose acquisition companies, paperless initiatives and trading systems

Special Purpose Acquisition Company (SPAC)

• SEHK introduced a listing regime for SPACs in January 2022
• A SPAC is a company without any commercial operation, which raises funds via IPO to acquire another company within a specified period, normally 2 years
• Investors in SPAC IPOs simply trust the SPAC board members as they do not know which company will be eventually acquired
• If the SPAC fails to acquire any company within the specified period, the SPAC will refund all its investors
• Also known as “blank cheque” companies

Paperless Initiatives

• In July 2021, SEHK introduced a paperless listing and subscription regime, online display of documents and a reduction in the types of documents on display
• Aims are to support environmental protection, make IPO process more efficient and mitigate impact on distribution of printed documents by special situations (eg pandemic)
• This digitisation initiative triggered many Exchange rule and regulation amendments

Trading Platform for the Securities Market

• The SEHK’s trading system moved to the Orion Trading Platform – Securities Market (OTP-C) from AMS/3 in February 2018, and is only accessible to Exchange Participants (EPs)
• EPs must subscribe to Orion Central Gateway and connect to the system via Broker Supplied Systems (BSS) or New Securities Trading Device (NSTD)
• BSS is an in-house developed system, while a NSTD is a Window-based trading facility

TOPIC 3 – PARTICIPANTS IN THE MARKETS

• Dates and data updated for the number of Exchange Participants in Hong Kong – 604 at 31 October 2022
• Material added relating to agencies and public bodies:

Financial Services and The Treasury Bureau (FSTB)

• The FSTB, one of the Government’s policy bureaus, is responsible for developing and executing government policy on finance and treasury
• Aims include maintaining the financial stability of Hong Kong and enhancing Hong Kong as a global financial centre
• Works closely with market regulators and participants to capitalise on opportunities for Hong Kong’s financial services sector
• Seeks breakthroughs in green finance and financial technology development

Financial Services Development Council (FDC)

• Acts as an advisory body to the financial services industry in terms of formulating proposals and identifying strategic directions to promote the further development of the industry in Hong Kong
• Key objectives are:
  • Advise the Government on strategies and measures to expand Hong Kong’s financial markets and enhance its competitiveness as an international financial centre
  • Support Hong Kong’s financial services industry in developing the core competencies and knowledge of its practitioners
  • Promote Hong Kong’s financial services industry in China as well as overseas

TOPIC 4 – TYPES OF SECURITIES

• New material relating to bond analysis:

Bond Analysis

• Bonds tend to provide investors with more stable returns than stocks
• The major risk of bonds is default risk
• Some governments and some corporates have defaulted their bonds over the last 20 years
• There are two simple ways to evaluate the default risk of bonds:
  • Credit ratings provided by credit rating agencies; and
  • Bond yields from bond trading
• Provision of credit rating services in Hong Kong is a Type 10 SFC regulated activity
• Assuming credit ratings are reliable, better credit ratings should be associated with lower bond yields
• Investment-grade bonds are considered safe with ratings above BBB for S&P and Fitch
• Non-investment grades are also known as speculative grades
• Credit spread is the difference between a bond’s yield and the risk-free bond yield (normally US Treasury bond yields
• Investment-grade bonds have a credit spread of less than or equal to 2% (200 basis points)

 TOPIC 5 – STOCK MARKET ADMINISTRATION

• The Stock Exchange trading tariff of HK$0.50 has been dropped
• An investor identification regime for the Hong Kong securities market (HKIDR) was introduced on 20 March 2023 in which intermediaries are required to assign each of their clients a Broker-Client Assigned Number (BCAN)

TOPIC 6 –SECURITIES ANALYSIS

• New material relating to metrics on stock selection:

METRICS ON STOCK SELECTION

• Metrics used for stock selection are dependent upon the investment strategies used by investors
• Investors preferring stable income will look for stable and positive earnings per share (EPS) over time
• Investors who prefer growth stocks will look to price-earnings-to-growth (PEG):

PEG  =  P/E ratio / EPS growth x 100

• A low PEG means a low P/E ratio but a high growth rate, possibly indicating high-growth stocks that are undervalued
• Investors preferring low risk stocks may look at debt-to-equity ratio, low beta and large firm size
• Investors optimistic about future economic growth may consider high debt-to-equity ratio, high beta and small firm size firms
• There are investment portals that provide stock screening functions to help investors organise potential stocks using their preferred ratios and technical indicators. The example below is from the Yahoo Finance website:

• “Near price highs” is a strategy to capture upward momentum. Studies have shown that stocks with recent strong growth tend to rise further – part of technical analysis
• “Momentum” is a strategy to consider stocks with recent promising positive moves – also part of technical analysis
• An investment strategy and the underlying principles need to be identified before considering relevant indicators