I Own the Wrong Index, Not the Wrong Businesses

Five of my seven index exposures are up this year. The two that are down are both in Hong Kong. Here is how I tell a sell-off in the vehicle from a broken business.

Victoria Peak, Hong Kong. September 2025.

On 26 June I ran the half-year numbers. Five of the seven indices I follow were green; the two that were red were both in Hong Kong, where I hold individual businesses, not just a fund. My own capital, marked down while the rest of the screen looked cheerful. I did not close the laptop.

Here is the scoreboard, year to date through 26 June.

A word on proportion first. My entire China exposure, including the cash I hold against it, is about 19% of the portfolio, concentrated enough to matter and contained enough to stress-test honestly. The rest sits in the United States, Europe, and across Asia, inside the same income, growth, and venture structure I use everywhere. China is where I do my deepest work, because it rewards it.

Am I being repriced for the businesses I actually own, or dragged by the vehicle they trade inside? Hong Kong’s underperformance is not one drawdown to wait out. It is a sorting problem: which of my Hong Kong holdings are genuinely impaired, and which are sound businesses caught in an unloved index.

I sit on both sides of that line. Hang Seng Tech is a growth position, so a 22% fall is a 22% drawdown, and that was the bargain when I bought it. The banks, utilities, telecoms and insurer are different: those I own one by one. A fund is a basket: a rotten apple inside it is not mine to act on, and I accepted that going in. My own book is a stock-picker’s basket, where a rotten apple is mine to find and mine to cut. So a fall in the fund is the drawdown, full stop; a fall in my businesses is only a mark on what someone will pay today, and the work is deciding, name by name, whether the mark is right.

The easy read is that China has rolled over. That is too simple. Last year the Hang Seng returned almost 28% and Hang Seng Tech 23%. This year both are in reverse, while across the border the STAR 50 and ChiNext indices have run up by more than a quarter over the same months. One country, three completely different tapes. The companies I hold were telling me otherwise.

Retail sales: the obvious read, and the incomplete one

The Chinese consumer is soft and property is still broken. Retail sales fell 0.6% in May from a year earlier, the first annual decline since late 2022; car sales dropped 16% and property investment over the first five months fell another 16%. If you want to sell the idea that China is uninvestable, Hong Kong is the most liquid place to do it.

But uninvestable is too large a word for the evidence. Industrial output still rose around 4.5% in May, and exports grew by double digits over the first four months of the year. The economy is not uniformly weak. It is split: genuinely soft in domestic consumption, sturdy in manufacturing and technology. If the problem were simply a weak China, the mainland boards would not be among the strongest in the world this year. Something more specific is happening inside the Hong Kong vehicle.

My Hong Kong exposure is a bet on particular businesses, not on a retail-sales print: state banks earning and paying out a spread, utilities and telecoms on regulated or near-monopoly cashflows, an insurer rebuilding its model, a platform giant rebuilding its stack around an open-source AI model, carmakers taking European share at higher margins, and a few semiconductor and software names tied to industrial policy. Part of that book lives or dies on the consumer. Most does not. The index draws no such line. I have to.

The vehicle problem: Hang Seng Tech is not the AI trade

The global rally of 2026 has been an AI hardware and capex story, and the Hong Kong tech index is not built to capture it. The names leading the world this year, the chip designers, the server makers, the data-centre landlords, the power providers, are listed in New York, Taipei, or on the mainland, not in Hong Kong.

Standard Chartered’s own wealth research lays it out plainly: Hang Seng Tech is roughly half internet and platform companies, about 15% electric vehicles, and under a fifth upstream AI hardware and semiconductors. It leans on exactly the parts of Chinese tech the retail number hurts, and is thin in the build-out. The AI hardware cycle is real but largely onshore, which is why the STAR 50 and ChiNext have flown while Hang Seng Tech has sunk.

Hong Kong also printed a great deal of new paper. More than 110 listings raised something like HKD 280 billion last year, a more than threefold jump on the year before. That is a supply problem for the old internet complex, not proof that every new line on the exchange is broken.

And the index compiler knows it. On 8 June Hang Seng Tech took in its first two pure-play AI model makers, MiniMax and Zhipu (the company behind the GLM model), dropping Kingdee and Kingsoft to make room. Both listed in Hong Kong only in January and have since run several times over. The gauge built for the last cycle of Chinese tech is being rewired for this one: the index I am marked against in June is not the one I will face by December.

This is the trap, and the June reshuffle proves it. A single quote screen prices very different things as one, and even its own compiler is busy redrawing what counts as Hong Kong tech. I will not read a verdict on my holdings off it.

I should grant the obvious objection: the vehicle story is also a convenient one for someone who would rather not sell, blaming the index compiler instead of asking whether I own the wrong businesses. Fair. What keeps it honest is that each position carries its own kill conditions, written down before the screen turned red.

Three buckets for a drawdown

I have written before, in Volatility Is the Admission Price, Not the Risk, about the four questions I run in any sell-off: has management integrity changed, has the industry structure worsened for good, has regulation impaired the model, has the balance sheet become a real problem. But when a whole sleeve lags at once, I sort the names into three buckets first.

One: the business has changed and the thesis is weaker, which earns a hard look and perhaps a cut. Two: the business is fine and the category, not the company, is being liquidated. Three: the business is fine and now cheaper, where I would add if the underwriting holds. The honest constraint is that I am already fully allocated to every one of these names. Adding means over-allocating beyond the weight I set in calmer weather, a bar I clear only at an exceptional price. The vehicle is cheaper than it was. Not cheap enough yet. So I am not adding yet: price and evidence, not hesitation.

The contradiction, in two names

Take BYD, the sharpest contradiction I own. One metric I track is European registrations, and over the first four months of the year they more than doubled past 100,000 units, enough to overtake Tesla on the continent, and at higher margins than it fights for at home. The domestic price war is real and unfinished, so this is no clean bill of health. But on the metric that matters to my underwriting, export margins rather than the home price war, nothing has yet turned. BYD peaked at around HKD 113 in April and trades below HKD 73 today, tracking the sector down while its own sales climbed.

I can hold it without flinching because I wrote the kill conditions down in calmer weather. The case breaks if Europe shuts the door faster than the factories can localise, through tariffs or local-content rules, or if the price war reaches the export margins. Neither has happened. For now the operating metrics confirm the thesis even as the screen denies it: not proof, and a read that can change with the next print, but when what I track and the quote disagree this loudly, I side with the cars over the screen.

China Merchants Port Holdings makes the same point without the glamour. It is the sort of infrastructure sold indiscriminately whenever China is out of favour. Its first-quarter metrics ran the other way to its shares: revenue up roughly 5% year on year, container throughput up around 4%. Profit was the softer line, and I will not bury that, but for an asset I own over a multi-year horizon the test is whether it is still used and still earning, and rising volume and revenue say it is. One quarter's margin move does not change that. Second bucket: a working business inside an unloved vehicle, sold off with the category.

The rest of the book runs through the same test, more briefly. The platform and EV complex is where earnings pressure is genuinely real, consumption soft, the delivery and ride-hailing fight brutal, the ad recovery patchy, yet the platform giant is rebuilding its cloud around its open-source model, so the next few quarters may read badly while the multi-year case holds.

The banks, insurers, utilities and telecoms are a different animal: liquid, widely foreign-owned, among the first things sold in any China risk-off, which is why they get dragged down alongside Hang Seng Tech while sharing almost none of its fundamentals. The sell-off also lifts their yield. The four state banks I hold as bonds, not stocks sit below book at around 5.5% today, against the 6.8 to 7.4 per cent I earn on cost; the three state telcos I own for the income yield roughly 6% on their Hong Kong lines. Below book on that kind of yield is a bet on balance-sheet survival and dividend policy, not AI capex.

The AI-adjacent software and semiconductor names are the most volatile of the lot, because their thesis leans on a hardware cycle largely not listed here: they can be right about the trend and wrong about the route.

What would make me wrong

Four developments would move a name from out of favour to genuinely impaired: a stalled cloud and AI transformation at the platform giant, with margins compressing and no path back; BYD’s overseas expansion blocked by tariffs or local-content rules moving faster than its factories; a dividend cut at an income name from balance-sheet stress rather than a policy tweak; or a credit event travelling from property into the banks.

None of those has happened. What has happened is duller: the market found better stories to tell elsewhere, and for now it has gone to tell them.

The admission price this time

In Volatility Is the Admission Price, Not the Risk, the admission price was watching real money disappear while every instinct screamed at me to act. This time it is quieter and harder: watching an index I sit inside lag a world that has found a better story to tell. The discipline is to keep that price from rewriting the underwriting.

The real risk is not the drawdown but selling a good business because the wrong index was liquidated first. Sitting with that is harder than it sounds on the page. The screen refreshes every few seconds. The filings are months away. So I hold.

The port operator has already answered its question: volumes and revenue up, so it comes off the open list. The two still undecided are the platform giant’s cloud-margin trajectory and BYD’s first-half European registrations. Those will tell me whether I own the wrong business or merely the wrong index, and I have decided each answer in advance: confirmation at a price this cheap is where I over-allocate, a broken kill condition is where I cut, anything in between is hold. Until the filings land, that distinction is the only one that matters.

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As of the date of publication, I hold positions in Alibaba Group Holding (HKEX: 9988), BYD Company Limited (HKEX: 1211), and China Merchants Port Holdings (HKEX: 144), as well as in the Hong Kong-listed banks, utilities, telecoms, insurers, and tech names referenced in the body. Positions may change after publication without notice. Cohong Lane is a periodical publication made generally available to the public; this is disclosure of my positions, not a recommendation to buy, sell, or hold any securities. Full disclaimer · About Philip.