With its currency pegged to the US dollar, Hong Kong flinches when the Federal Reserve starts raising interest rates.
The scars from the Fed’s aggressive 525-basis-point hiking cycle, whichbegan in March2022, arestill fresh. With borrowing costs adjusting swiftly and sharply, home prices and the Hang Seng Index havetumbled by as much as 16% and 44% from their late-2021 peaks. In 2022, theHong Kong Mandatory Provident Fund, the city’s employee retirement system that had HK$1.7 trillion assets under management as of June, suffered its worst losssince the Global Financial Crisis.
So it might be time for residentsto take a careful look at their wealth portfolios to protect against downside risks. A typical MPF account would have two-thirds of its allocationin equities, 21% in debt securities and the rest in cash deposits.
With most tenorsnow yielding above 5%, US sovereign debt is looking appealing. Hong Kong investorsface almost no currency risk. They don’t need to worry much about inflation eroding fixed-income payouts, since the city’s cost of living is anchored to China’s deflationary economy.There’s no capital gains tax either.
There’s also a substantial cushion against losses. The 10-year Treasury yield would need to rise to about 6%over the next year for an investor to lose money overall, because the interest payments help offset any decline in the bond’s price. Meanwhile, the potential gains are much larger: A one-percentage-point rise in yields would result in a total loss of less than 2%, while an equivalent decline could deliver a return of about 13%, combining interest income with the increase in the bond’s value.
One reason investors might hesitateis that the classic balanced portfolio, with 60% in equities and 40% in fixed income, failed to offer diversification in 2022, when both stocks and bonds tumbled. But the valuations then werevery different. At the onset of 2022, both equities and bonds were expensiveafter two years of exceptionally easy monetary and fiscal policiesin response to the Covid-19 pandemic.
Four years on, stocks are looking even more expensive judgingby the equity risk premium, orthe extra returns investors can expect to earn. On the other hand, bonds are now offering real returns.
If anything, the current setup is more akin to early 2000 before the dot-com bubble burst. The turn of the century was a great time to buy bonds, noted Gavekal Research’s Will Denyer.
Granted, the Fed is not expected to replicate the magnitude of its last hiking cycle, with the market pricing in less than a percentage-point increaseover the next year. As a result, Hong Kong residents may not feel the urgency to reshuffle their investmentportfolios.
But it doesn’t pay to be complacent. Higher financing costs, a weak Chinese economy, and Beijing tightening cross-border capital outflows are all majorheadwinds that won’t go away soon. It doesn’t take much to create the next perfect storm— and investors need to hedge in advance.
Coupon-clipping is not jazzy or exciting. But it preserves wealth so that one has capital to deploy when animal spirits wake up again. For those in Hong Kong, buying US Treasuries is a no-brainer.
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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
This article was generated from an automated news agency feed without modifications to text.
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