Hong Kong investors run to safety

Asset Class in Focus

Global equity markets have rallied this year, but two-thirds of fund sales in Hong Kong are in fixed income products.

Global equity markets have rebounded this year, with the US leading at 18% during the first half. Fixed income markets have also rebounded, even emerging market and Asia high yield bonds.

 

Source: Manulife Investment Management

 

However, Bruno Lee, Hong Kong-based regional head of retail wealth distribution for Asia at Manulife Investment Management, does not expect bond or equity markets will continue to perform strongly during the second half this year.

Fixed income was 66% of total gross funds sales in the SAR at the end of April, compared to 22.5% during Q2 last year

“We are not expecting performance to double toward the second half,” he said at a recent media briefing.

Lee cited concerns over elevated trade tensions between the US and China that weigh on economic activity. In addition, the US has been showing signs that it might be at the end of its economic cycle, which may weaken growth in mid-2020.

Bond fund sales surge

These concerns have made investors in Hong Kong to become conservative in their investments despite the performance of global equity markets, according to Lee.

Citing data from the Hong Kong Investment Funds Association (HKIFA), Lee showed that fixed income funds accounted for 66.1% of total gross funds sales in the SAR as of the end of April, which compares to just 22.5% during the second quarter last year.

Quarterly gross sales breakdown by major fund categories

Source: Manulife Investment Management

For the one year period to end of the first half 2019, gross sales for both equity and mixed-asset funds have declined.

“It is absolutely reasonable to expect that investors are taking a conservative stance given a very strong rebound in the first half this year,” he added.

“They may have taken a shorter-term view and rebalanced their portfolios to capture some of the rebound [in the equity markets] and shifted toward other asset classes to lock in some of their profits.”

Similarly, Deutsche Bank Wealth Management recently recommended clients to take profits now and move into more defensive parts of the market.

Income theme continues

Separately, Lee noted that regular steady income is the most important feature for investors in Asia, citing survey findings from Cerulli Associates.

“Investors across Asia continue to adopt a relatively conservative view of chasing after yield.”

Most important features for retail investors in Asia

Source: Manulife Investment Management

Most investors have searched for yield through fixed income investments. However, Lee believes that they should also look at Asia-Pacific real estate investment trusts (REITs), as they can provide a steady payout to investors.

REITs usually distribute a minimum of 90% of their rental income as dividends to investors, Lee added.

Pictet Wealth Management has also recommended REITs to investors.

“REITs are giving you pretty good returns of around 5-7%. They are also interesting vehicles because they have low leverage and are very disciplined in terms of managing their debt,” David Gaud, Pictet WM’s chief investment officer for Asia, said recently.

In September, Manulife IM launched its Asia Pacific REIT fund, according to data from FE Analytics. The fund, which now has nearly $200m in assets, invests at least 70% of its portfolio in REITs and has the flexibility to invest up to 30% in non-REIT real estate-related securities to achieve stable income.


The Manulife Asia Pacific REIT fund versus category and GPR 250 REIT Asia Index

Source: FE. In US dollars, since inception of the fund. The index is for comparative purpose only. The fund does not have a benchmark index.

 

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