The emphasis on the “Two Circulations” drew a lot of market attention, relevant domestic sectors saw an improving outlook with policy aid. While the new economy sectors remain the core investment in Chinese markets, betting on the recovery in the real economy, some traditional sectors such as industrials, materials, or logistics alike could also benefit from the “Domestic Circulation”.

Although the economy is still significantly worse than what we have at the beginning of the year, the Chinese economy continues to improve as indicated by the steady PMI figures. Although we remain bullish on the market in the mid to long-term, investors should bear in mind that the political risks arising from trade tensions and Sino-US conflicts have risen. Together with the uncertainties posed by the US elections, we would suggest limiting exposure to relevant markets for the time being, so as to insulate from the risks as the fourth quarter approaches.

Covid remains on the centre stage in the market. At the time of writing, there are 7 vaccines currently in phase 3 trials, the Centers for Disease Control and Prevention (CDC) also told State governments to be prepared for vaccine programmes as early as November this year. Anticipating an end to the epidemic, markets pushed valuations high, far outpacing the earnings forecast, further raising concerns over the possibly overheated market.

Key economic indicators continue to show conflicting signals. While the PMI figures and consumer sentiment alike point to a gradual improvement, CB consumer confidence being down is a red flag for the economy, initial jobless claims staying elevated also adds to the narrative of a sluggish recovery. Although we are bullish on US equities, in particular tech and healthcare sectors in the long term, with the continued infighting in the Congress and Senate deeming further stimulation bills nigh impossible, along with further uncertainties posed by the November elections, and the equity market itself potentially overvalued, investors should be prepared for possible corrections due to heightened risks.

Harris Fraser Group collected three trophies from iFAST Wealth Advisers Awards 2020. We are proud to receive the iFAST Wealth Advisers Award 2020 - Best Discretionary Portfolio Manager (Bonds).  Our consultants Fannie Lam and Edmond Mak both won their Individual Advisor Awards as well, we thank you for the industry recognition and sending our warmest congratulations to all winners!

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Weekly Insight Sept 11

U.S

After the crash on September 3, the downtrend in US and technology stocks seems to have somewhat subsided. However, over the 5 days ending Thursday, the Dow, the S&P, and the Nasdaq are still down 5.38%, 6.75%, and 9.43% respectively. In particular, TESLA, one of the focus of the market, is down as much as 34% from its peak. Although the six weeks of additional unemployment benefits authorized by Trump at the beginning of August is coming to an end, the scaled-back version of the stimulus package proposed by Republicans failed to pass in the Senate; House Speaker Nancy Pelosi criticized that the stimulus bill failed to include measures to combat the epidemic. On the economic front, the latest figures on initial jobless claims are still higher than projected and have raised concerns in the market. The development of the covid epidemic is also worrying. India has overtaken Brazil as the country with the second highest number of confirmed cases in the world, while Europe is once again in the spotlight with more new cases than the US. Next week, the US will release data on retail sales and market sentiment.

Europe

This wave of decline in technology stocks, which mainly affected the US market, did not seem to have a significant impact on the European market, as European equities went up over the week, the UK, French, and German equity indexes rose 3.52%, 1.19%, and 2.85% respectively over the past 5 days ending Thursday. The risk of Brexit has risen again, with the European Union (EU) giving a three-week notice to the UK to withdraw the relevant legislation that is not in line with the Brexit agreement, stating that the EU will take legal action, but the UK government rejected the EU at the Thursday talks, after which the Pound plunged further to 1.2774, its sharpest one-day fall since March. On the other hand, the European Central Bank (ECB) kept its policy and interest rates unchanged, and President Lagarde said the ECB will keep a close eye on the Euro, but did not hint at any urgent policy adjustments, sending the Euro higher. Next week, the UK will release CPI data for August.

China

Over the past week, both Hong Kong and China's A-shares were dragged down by the fall of global tech stocks. The Hang Seng Index fell 0.78% and the Shanghai Composite Index fell 2.83%, while the Shenzhen Composite Index, the best performer so far this year, dropped 5.51%. Recent economic figures released by China were satisfactory. Exports in USD terms rose by 9.5% YoY in August, which was better than expected; foreign exchange reserves rose further to US$3.16 trillion in August; China's CPI dropped to 2.4% YoY in August, easing inflationary pressure. In addition, new RMB loans and aggregate financing also increased in August MoM. Next week, China will release data on fixed investment, industrial production and retail sales for August.

Weekly Insight Sept 4

U.S

On Thursday, US stocks saw a sharp correction, with major technology stocks such as Apple, Microsoft, Amazon, and Facebook leading losses; the S&P 500 index fell from a record high, down more than 3.5 percent in a day, marking its sharpest drop since early June; meanwhile, the Nasdaq 100 also fell 5 percent, its biggest single-day drop since March. The Philadelphia Semiconductor Index, which reflects the performance of stocks of major semiconductor companies, fell sharply in Thursday's session amid reports that China may plan to fully support the development of the domestic semiconductor industry. The VIX index, which reflects panic levels in the market, rose sharply on Thursday to its highest level since June 2020. On the technical side, US stocks were also overbought. Before the Thursday correction, the 14-day RSI of the S&P 500 hit 82.9, its highest level since January 2018. The global covid epidemic continued to spread, with more than 26 million cases reported across the globe. Next week, the US will release the Consumer Price Index and the NFIB SME Optimism Index for August.

Europe

Dragged down by the tech sector, European equities also fell on Thursday, with Europe's Stoxx 600 index losing 1.4% in the session, down 0.74% over 5 days ending Thursday. The Eurozone's latest Markit manufacturing PMI for August fell to 51.7, down from 54.9 in the previous month, while the Eurozone's unemployment rate for July was 7.9%, up from 7.7% in June. Eurozone CPI contracted by 0.2% YoY in August, the first negative reading since May 2016, and reflecting continued weakness in Eurozone inflation. Next week, the ECB will hold an interest rate meeting, markets expect the policy to remain unchanged, yet the ECB may still increase asset purchases again before the end of the year.

China

Both China A-shares and Hong Kong equities were down for the week, with the CSI 300 Index slipping 1.53% and the Hang Seng Index losing 2.86% over the week. The HSI fell over 500 points on Friday, then managed to reclaim some ground afterwards. Xiaomi, one of the latest blue-chip inclusions, managed to recover from the earlier loss, but Alibaba and Tencent still fell over 3% over the day. In terms of economic data, China's official manufacturing PMI for August was 51.0, slightly lower than the previous reading of 51.1, while the official non-manufacturing PMI for August was 55.2, up from 54.2 in the previous month. Next week, China's CPI, foreign exchange reserves, and import/export data for August will be released.

What is leveraged bond investment?
As the name suggests, leveraged bonds investments are a combination of leverage and bonds. Usually, investors will pledge their invested bond assets to a lender, and then reinvest the borrowed money to achieve leverage. Private banks are the most common lenders, but sometimes retail banks or brokerage firms may also offer such services.

Focusing on the arbitrage
Leverage operations often use bonds or bond funds as investment assets, hoping to gain through arbitrage, without bearing large fluctuations in the asset price. For instance, if the investment bond yields 7% and the cost of financing is only 4%, investors can obtain an additional 3% of arbitrage yield every time they increase the leverage factor by 1.

How is leverage calculated?
One might ask, what leverage can you get with bond investment? For the generic investment grade bonds, where defaults are far and few between, the usual leverage factor may be up to 5 times, which industry peers would call it an 80% loan-to-value (LTV) ratio. If you borrow the full 80% LTV, it means you borrowed 80 dollars out of the 100-dollar asset, only contributing 20 dollars, which is equivalent to a leverage factor of 5. 

What is the risk involved?
Under normal circumstances, bonds with lower default risk and higher credit ratings is usually given a higher LTV ratio. But with a higher credit rating, the bond yield tends to be on the lower end, and such a low yield will reduce your intention to leverage that bond. In addition, even if the lender agrees to a high LTV ratio, investors do not necessarily need to use the full extent of the leverage, as it may increase the risk of margin call.

How to calculate the interest cost?
Most lenders offer credit facilities with interest rate using the financing rate plus a margin, e.g., one-month USD LIBOR or HKD HIBOR plus a margin of 1.0% - 1.5% as the borrowing rate, depends on the currency borrowed. If the 1-month USD LIBOR or HKD HIBOR is, say 2%, the overall financing cost during this period will likely fall between 3.0% - 3.5%.

Remember to consider the suitability
At this point, you might have noticed that the main source of return is the interest rate differential, leveraging does not make sense if the bond yield is too low, which at least has to exceed the financing cost. Bear in mind, leveraged bond investments will face higher investment risks, and the comprehensive list of risks will not be listed here. If investors would like to engage in this type of investment, they must consider their suitability (Risk tolerance etc.), and consult your investment advisor.
 

The 2019-20 Good MPF employer award is organized by the MPFA for six consecutive years since 2015. This year, Harris Fraser is honored to receive the awards for "Good MPF Employer Award", "e-Contribution Award" and "MPF Support Award", as being recognized for the commitments to enhancing the retirement benefits of the employees.
The Good MPF Employer Award aims to not only cultivate employers’ responsibility under the law, but also encourage employers’ efforts to further enhance the retirement protection of their employees.

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United States

The US Food and Drug Administration (FDA) issued an emergency use authorization for COVID-19 convalescent plasma in COVID treatment, concluding that it may be effective and “the known and potential benefits of the product outweigh the known and potential risks of the product”. The positive development in fighting the global pandemic drove all three US major stock indexes up. Over the past trading 5 days ending Thursday, the S&P 500 index gained 2.92% and reached a record high; the Dow and the NASDAQ also rose 2.71% and 3.19% respectively. As for the economy, some economists see an uneven “K-Shaped” recovery from the COVID crisis, expecting a further widening wealth gap arising from the aftermath. On a side note, the Fed chair Jerome Powell officially announced Fed’s new policy framework at the annual Jackson Hole Symposium, setting full employment as the primary target, pledging to hold rates low through 2022, and allowing inflation to exceed the target level of 2%. Next week, the US will announce the ISM manufacturing PMI and the unemployment rate.

Europe

As for European equities, the German and French stock markets fared better. Over the past 5 days ending Thursday, the two markets rose 2.60% and 2.44% respectively, while the UK equities fell 0.03% over the same period. François Villeroy de Galhau, the Governor of the Bank of France, said that the country's economy has rebounded in line with expectations, claiming that the only revise needed for the economic outlook is upwards. He continued that the European Central Bank will maintain low interest rates and holds sufficient liquidity to support the recovery in the Eurozone. It was also reported that Germany has decided to take Brexit issues off the table at the EU Ambassadors’ Summit, citing the lack of significant progress in the talks. Next week, the Eurozone July unemployment rate and the August CPI will be announced.

China

The Shanghai and Shenzhen stock markets remained relatively volatile. Over the week, CSI 300 index gained 2.66%, and the Heng Seng Index also rose 1.23%. According to market data, China has increased purchases of US crude and agricultural products, trade negotiators from both sides spoke over the phone earlier in the week, reassuring the markets that the Phase 1 deal remains on track. In terms of economic data, Chinese industrial profits recorded a YoY growth of 19.6% in July, strengthening the argument for a solid economic recovery. Next week, China will release an array of PMIs, market expects them to remain in a stable recovery trend.

United States

Despite deteriorating Sino-US relations, the US equity markets remains optimistic, extending the bull run over the week. Over the past 5 days ending Thursday, the S&P 500 rose 0.36%, while the NASDAQ surged 2.01% and briefly hit a record high of 11283.62, driven by the strong performance of Big Tech. The current epidemic remains severe and uncertainties remain, the latest US initial jobless claims figure once again exceeded the 1 million mark. On a side note, US elections are scheduled for November 2020. With Biden officially announcing candidacy, markets will keep a close eye on the latest developments, which should set the tone for the economy and financial markets in the coming 4 years. Next week, the US will announce the August figures for the Conference Board consumer confidence index and the University of Michigan consumer sentiment index.

Europe

European equities had a relatively weak recent performance. Over the past five trading days ending Thursday, the UK, French, and German stock markets fell 2.79%, 2.60%, and 1.26% respectively. The market remained concerned about the voting in Belarus. EU leaders have stopped calling for new elections in the country, but reiterated that they would not accept the results of the August 9th voting. In terms of economic data, the Eurozone Manufacturing Managers’ Index in August came in at 51.7, which is slightly lower than both 51.8 from the previous month, and the market expectation of 52.7. In addition, the final value of the Eurozone Consumer Price Index (CPI) in July was revised down to -0.4%, while the YoY increase remained at 0.4%. Germany will announce the August IFO forecast and August economic confidence index next week.

China

The Shanghai and Shenzhen stock markets remained relatively volatile. Over the week, the CSI 300 Index gained 0.30%; while the Heng Seng Index saw a slight correction and fell 0.27% over the same period. Earlier, the Ministry of Commerce of China stated that it expects the Chinese trade and services industry to face a difficult and complex macro environment in the second half of the year, mainly due to shrinking international demand. The news adversely affected the positive market sentiment, reversing the Shanghai Composite’s four-day rally. In addition, the People's Bank of China announced the LPR interest rate, the one-year and five-year interest rates remained unchanged as markets expected. Chinese industrial profits data in July will be released next week.

The covid epidemic in Japan remains relatively uncontained, with confirmed cases finally present in every single prefecture. Virus hotspots in various metropolitan areas contributed to the sustained transmission in the country, Tokyo and Osaka reported record infection figures over the month. Despite the virus seemingly having a comeback, the Abe-led government saw no need for reinstating the nationwide state of emergency, only reemphasizing the importance of social distancing and taking care of the groups at risk.

Although global vaccine efforts seem to have yielded positive results, it is still questionable if there will be sufficient vaccinations by summer 2021, casting doubt over whether the delayed Olympics could still be held as scheduled. The tourism and airline industry are also expected to suffer lasting damage from the epidemic as the human behaviour changes permanently. Together these negative factors put a further dent to the struggling economy, weakened growth prospects makes the Japanese market a less attractive investment.