In the face of difficult economic and political conditions at home, the typical Hong Kong retail investor’s portfolio is broadening rapidly into a range of new assets.
As much as 52% of investors surveyed are already diversifying their portfolios from a Hong Kong focus to globally balanced investments, with a strong tilt towards North American markets (56%), followed by wider Asian market exposure (54%).
However, around 57% of local brokers believe that their current technology platforms are not scalable enough to support their growth plans and ability to service the shifting preferences among its investor base, according to a study conducted by fintech firm Broadridge Financial Solutions with ValueExchange and Interactive Brokers.
“The typical Hong Kong investor is evolving from Hong Kong stock picking to running a globally balanced portfolio that includes risk management tools and well-diversified exposures,” said the report, “Asian Brokerage in Transformation”, which received contributions in May from 200 investors and brokers in the territory.
Yet, data collected by the Hong Kong Investment Funds Association showed that net outflows of $4.7bn from retail fund sales in Hong Kong in the first half of the year were greater than during the global financial crisis.
On the other hand, although most equity-invested vehicles experienced exits, international equity funds attracted net inflows of $627bn and “sector” funds, including those with mandates to invest in technology stocks enjoyed net inflows of $518m.
But, rather than a radical change in geographic allocations, it is the range and sophistication of investment products that most marks the shift in Hong Kong investors’s preferences, according to the Broadridge report.
“This expansion is not happening gradually. Hong Kong investors are making this transition right now [with] 52% of investors are doing this in 2020,” said the report.
Although Hong Kongers have been investing in a wide range of complex investment instruments for several decades, there is now an increasing demand for asset classes, such as fixed income (growing at 15% year-on-year), futures and options (13%), currencies (13%), private equity (11%) and mutual funds (10%).
Indeed, the tilt towards global fixed income products has also been recorded by Morningstar.
Moreover, Hong Kong investors are becoming increasingly institutional in their behaviour by prioritising high-quality market data and cross-asset hedging as core requirements, second only to trading costs.
“Functionally, investors are behaving like institutions now: they want one screen, one market and trading all hours of the day,” said the report.
Hong Kong investors have for a long time bought “yield enhancement” products, such as leveraged notes and high yield bonds, but now they are equally keen to invest into insurance products, structured products and mutual funds to help risk management.
Local brokers struggle
This creates a significant sales and distribution opportunity for brokerages and banks, according to Broadridge.
Yet, despite a clear desire from investors to see their brokers broaden their capabilities, markets and products within 2020, the majority of brokers see their expansion plans as 2021-deliverables, lagging up to 12 months behind their customers, the report found.
Basically, local brokers need to invest in new technologies to upgrade systems.
Either they can broaden their offerings to include new asset classes (such as option overlays, bonds and mutual funds) or new capabilities (such as night-trading in the US market) which would strain their existing platforms, or they can expand their margin lending revenues by broadening the range of assets that investors can leverage.
The alternative is to be left behind by global banking and brokerage firms, as well as new fintech entrants, just when there is growing integration between mainland China and Hong Kong customer bases through the Wealth Connect scheme.
“But as fast as Hong Kong’s brokers may be reacting to these dynamics, they appear not to be moving as fast as their investor clients need,” concluded the report.