Trade war knocks the stuffing out of Hong Kong investor confidence

Sino-US trade tensions are draining the confidence levels of Hong Kong investors, down to its lowest since the financial crisis, shifting the allocation of assets

Hong Kong investors have been reducing their allocation of equities and building up their cash positions in the past two months in response to a dramatic drop in their level of confidence in the financial markets amid trade war tensions.

"Sentiment is fragile as investors are grappling with lingering trade tensions, higher volatility and slowing economic growth globally and in mainland China. About 56% of investors have reduced their risk appetite as a direct result of the US-China trade tensions. A stronger US dollar has also weighed on emerging markets, although we believe the US dollar is likely to weaken over the next few years," says Chris Tong, vice president for retail distribution at J.P. Morgan Asset Management (JPMAM).

The level of confidence as measured by the J.P. Morgan Hong Kong Investor Confidence Index (JPMICI) has plunged from 106 points to 88 points between October 22 and November 1, the lowest level since Q2 of 2009 following the financial crisis. This is also the first time the index has fallen below the neutral level of 100 points since 2009 (see graph).

During this period investors have become more risk-averse, with 30% indicating they would consider increasing their cash holding, while 29% reduced their exposure to risk assets such as equities, according to a survey accompanying the benchmark. The survey was conducted among 500 Hong Kong retail investors, aged 30-60 years, holding at least five years of investment experience and liquid assets of more than HK$200,000.

About 56% of the investors surveyed have become more conservative, 39% indicated no change in their risk appetite, while only 5% have become more aggressive during the period.

"Although it's important for investors to be vigilant given macro uncertainties, market declines have created some attractive valuations, presenting opportunities for investors with a long-term horizon," Tong says.

Tong argues that current market conditions present opportunities for investors to build core strategic positions, a viewpoint based on historical data that indicates there is significant upside for investors when Asia equities were trading on or around the current level of 1.5x price-to-book valuations.

The survey findings also indicate that there is a significant divide in financial engagement between investors who use mutual funds as part of their investment strategy and those who do not, with those who are already utilizing mutual funds being more active in retirement planning, start to save earlier on average and are more comfortable relying on fund investments.

On the other hand, investors who don't invest in mutual funds are less confident that their current portfolio will allow them to pursue their retirement goals, 51% versus 76% among fund investors. About 41% are yet to start saving for retirement.

"Although fund investors are more engaged in their finances, both subgroups of Hong Kong investors are taking an ultra-conservative approach to retirement planning, suggesting that they are more concerned about avoiding loss than they are about maximizing growth," says Wina Appleton, retirement strategist for J.P. Morgan Asset Management.

Investors hold 37% of their assets in risk-free but low-earning savings accounts, time deposits or savings insurance products which could curb their chances of accumulating sufficient funds for retirement.

"About 83% of investors intend to withdraw their MPF - Hong Kong's pension fund - benefits at the age of 65 and plan to allocate 55% of these benefits to cash, which may not keep up with inflation and life expectancies," Appleton says.

One development which may alter sentiment is that China and the United States have recently decided to avoid escalation of trade restrictive measures, without further raising existing tariffs imposed on each other and slapping new additional tariffs on other products. Time will tell how this alters future levels of investor confidence.

Date

6 Dec 2018

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