The bank’s advisory clients in Hong Kong – local high net worth and family offices – generally remain risk-averse, sentiment which is expected to extend from this year into 2020, Belle Liang, head of investment advisory, told FSA.
“Many clients are business people,” she said. “They are in the local economy and see retail and tourism industries are down and there is disruption and an economy in recession.
“People were quite cautious already because of China’s economy slowing considerably and the US-China trade dispute. This will carry over into 2020 – investors are looking for a safe haven [to put their cash].”
She said in 2019, Hang Seng responded to investor demand by introducing about 12 portfolios that only contained fixed maturity products (FMPs), for example, global, US dollar-denominated or Asia bonds.
FMPs, which many asset management firms have launched this year, combine a traditional bond fund with a fixed maturity date. They aim to provide more certainty in terms of future cash flow and interest rate risk.
Liang expects FMP demand to continue and the bank has more FMP portfolios ready for the first quarter. The FMPs used to build portfolios are from Hang Seng as well as third parties such as Templeton, Invesco and Value Partners, she said.
She also plans to look at alternatives, specifically multi-asset funds. “During this expanded economic cycle people want safety and multi-asset products are something they would count on [to limit the downside].”
ESG-themed funds are also coming to the forefront.
“ESG is a long-term, value-driven investment and there are many ESG-related themes such as education and new energy. We want to understand what clients are thinking and then we will talk to product issuers.”
In both stocks and bonds, the bank’s client portfolios “are already heavy on high yield products, mainly US and China high yield. Some clients are in a type of business similar to the issuers and they tend to understand the China real estate market and may know specific China property companies. We encourage clients not to add more high yield exposure”.
Liang, however, is optimistic on A-shares, which have been boosted by inclusion on global indexes.
“Local A-shares and Hong Kong equities have done well despite the trade dispute,” she said. (In fact year-to-date, in US dollar terms, the CSI 300 is up 28.6% and the Hang Seng is up 8.2%).
“Long-term, we see more institutional money going into the A-share market, largely from pension funds and insurance companies, and liquidity will improve.”
The A-share market ten years ago was 90% retail investors and 10% local institutions, but after the retail-driven market crash in 2015-2016, the situation changed, she said. China’s retail investors now account for 60% of the mainland markets and 40% is institutional.
“We are very bullish on A-shares and believe that the 40% institutional money can go to 70% in five years. The transition will be even faster because China is opening its financial industry to foreign investors.
She mentioned the relaxation of regulations that now allow 100% foreign ownership of a financial institution in China.
Hang Seng has multiple branches in China, but offshore banks have faced limitations. “Now restrictions are being relaxed and time for product approval is faster and [Hang Seng] is in a much better position to participate.”
Liang singled out the Sino-US trade relationship and China GDP growth slowdown as the biggest risks to client portfolios in 2020.
“These two factors will continue to weigh on the [local] market even if the US is doing well.”
She has scaled back return expectations for 2020.
In 2019, at the maturity of a given FMP, the return has been roughly 10% and returns from A-shares “have been decent”, she said.
“It’s very difficult to expect you will have that next year.
“We don’t think fixed income will have the same returns in 2020. The S&P continues to reach all-time highs but markets are bullish because the central banks are supporting them [with low interest rates], so people are complacent.
“But it’s not a good idea to count on central bank policies,” Liang said.