Harris Fraser |
자산 관리 계획
10 August, 2020
Bond Investment Strategies- Understanding the Characteristics of Different Bonds

In the previous article, we covered the tools available in the market for investing in bonds, if you are interested in investing in bonds, the next question that comes to mind might be: Which bond categories should I choose? With the wide range of bonds to choose from, each with different characteristics, understanding more may help you to minimize risk while maximize the return.

Understanding the Characteristics of Different Bonds

Government vs Corporate

The first characteristic is the classification of government or corporate bonds. As the name implies, government bonds are bonds issued by the government, commonly referred as sovereigns, the best known sovereigns include the US Treasuries and German Bunds. For bonds issued by developed countries such as the US or Germany alike, international rating agencies will usually give them a higher rating, as the default risk of these government bonds are likely close to zero, with a high level of liquidity. However, because of the lower risk factor, its yield to maturity is also low.

As for corporate bonds, they are issued by companies and are commonly used as working capital in the company’s operations. Apart from the individual risks of the companies themselves, investors of corporate bonds must also bear the risks of the relevant countries the companies are doing business in, so the risks tend to be relatively higher. With the heightened risk factors, most corporate bonds have higher yield to maturity, this is called the "risk premium” of the bond.

As an investor, corporate bond tend to carry a relatively higher risk, as we are exposed to both the country and company risks. However, under normal circumstances we could expect receiving a higher yield from the investment for taking the additional risk.

High Grade vs High Yield

Most global bonds would request ratings from renowned international rating agencies, such as S&P, Moody’s and Fitch. If a bond has a rating higher than BB+, it is considered an investment grade bond, which suggests a relatively higher credit quality. Due to the issuing company’s good cash flow management and better solvency, the risk of holding its bonds is lower, which also results in a lower interest rate return.

Whereas for bonds rated BB+ or below, they are classified as high yield bonds. Compared to investment grade bonds, high-yield bonds have higher yields and with better return on capital. However, bear in mind that high yield bonds are also known as junk bonds, suggesting a higher default rate; the bond price volatility will also be larger, potentially experiencing a stock-like drawdown.

For investors, keep in mind that high-yield bonds may not always be the ideal high return stable investment. If the overall economy or corporate earnings improve, high-yield bonds can usually generate better returns; on the contrary, when the market is more volatile and the economic outlook is weaker, investment grade bonds can better stabilise the portfolio. In addition, also note that investment grade bonds tend to have longer duration and are more likely subject to interest rate risk.

Fixed-rate vs Floating-rate

Fixed rate bonds are bonds that pay fixed coupons regularly, and a majority of the bonds in the market fall into this category. When investors invest in these bonds, as long as there are no special event like defaults happening, we can expect to receive regular fixed coupons along with the principal at maturity. The fixed coupon makes calculation relatively convenient, which allows investors to plan accordingly with the expected cash flows.

Floating rate bonds have a variable coupon amount, where the coupon rate is usually the sum of the interbank rate plus a fixed premium. Therefore if interest rate rises, the coupon will follow suit. Although the coupon amount is not as easily computable as fixed-rate bonds, the interest rate risk of floating rate bonds is much lower, as the change in market interest rates are likely reflected in the coupon rate, resulting in a more stable bond price.

If investors expect interest rates to further fall, choosing fixed-rate bonds will be more advantageous; on the contrary, if interest rates are expected to rise, floating-rate bonds can reduce the impact of rate hikes. However, fixed rate bonds usually allow investors to better control their cash flow.

All in all, different bond characteristics will expose investors to different risks. While higher risks usually accompany with higher potential returns, depending on the client’s profile and interests, there is no single ‘best’ choice that one can choose from. Always understand the risk profiles of investors and the product itself before making investment decisions to ensure that the best outcome is achieved.

 

Different Characteristics of Bonds

Government Issued:

  • Usually higher rated and have better liquidity, especially bonds issued by developed countries
  • Lower risks imply a lower yield

vs

Corporate Issued:

  • Tend to carry a higher risk, exposed to both country risks and company risks
  • Higher risks tend to offer higher yields

Investment Grade:

  • Rated higher than BB+
  • Tend to have higher credit quality, lower risks imply a lower yield
  • Tend to perform better in weaker economic outlook and volatile markets
  • Tend to have longer duration, more exposed to interest rate risk

vs

High Yield:

  • Rated at or lower than BB+
  • Tend to have weaker credit, higher default risk imply a higher yield
  • Tens to perform better in stronger economic outlook and less volatile markets
  • Tend to have shorter duration, less exposed to interest rate risk

Fixed Coupon:

  • Clearly defined coupon amounts
  • Better for cash flow control
  • Benefit from a rate cut environment

vs

Floating Rate:

  • Variable coupon amounts
  • Less certain cash flows
  • Perform better during a rate hike cycle

 

금융 시장 리포트
10 August, 2020
Weekly Insight Aug 7

Weekly Insight Aug 7

usaUS

The latest earnings season in the US is coming to an end. Among the 440 S&P 500 companies that have reported, around 84% of them beat market expectations. Over the past trading 5 days ending Thursday, the Dow and the S&P 500 were in the green for 5 consecutive trading days, gaining 4.08% and 3.17% respectively over the period; the Nasdaq even rose for 7 consecutive trading days and hit a new record high. Although the US Republicans and Democrats are still divided over certain key issues in the new stimulus bill, the overall negotiations still made progress. Together with US ISM manufacturing index improving and beating market expectations, the stock markets rallied. US Fed Vice Chairman Richard Clarida said that the Congress stimulus bills will help the US economy rebound in the second half of the year. It is worth mentioning that the US dollar index stayed weak, hitting a low of 92.52 on Thursday, the lowest level since May 2018; the price of gold continued to rise. At the time of writing, the spot gold price crossed $2,070 per ounce, continuing to set new record highs. The United States will release data on CPI and retail sales next week.

euroEurope

European equities followed the global markets and went up. The UK, French, and German equity indexes rose between 1.73% and 2.19% over the past 5 trading days ending Thursday. The latest quarterly earnings season in Europe is also coming to an end. Among the 342 STOXX 600 companies that have reported, about 63% beat market estimates, which is slightly lower than the 84% of the S&P 500. In particular, companies such as BMW recorded quarterly losses, while Commerzbank and Allianz also recorded steep falls in net profits. The Bank of England will hold the interest rate meeting next week, the market is looking for be any hints on possible interest rate cuts.

chinaChina

China and Hong Kong stock markets lagged behind Western markets. The CSI 300 Index only rose 0.27% over the week, while the Hang Seng Index fell 0.26%. US President Donald Trump signed an executive order prohibiting US companies and individuals from doing business with TikTok's parent company and WeChat. The news triggered market concerns over related sectors, relevant shares also saw sharp drops. China's export data in July improved, rising by 7.2% YoY in dollar terms, while market expected a decline of 0.6%. Next week, China will announce July data on fixed investment, industrial production, retail, and CPI.

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금융 시장 리포트
4 August, 2020
Weekly Insight July 31

Weekly Insight July 31

usaUS

Although the United States just announced that its 2020 Q2 GDP fell 32.9% QoQ annualised, which was the largest drop on record, several tech giants such as Facebook, Apple, Amazon, and Google’s parent company Alphabet still announced earnings beats, driving the tech sector up. Over the past 5 days ending Thursday, the S&P 500 and the NASDAQ rose 0.33% and 1.21% respectively, while the Dow fell 1.27%. The covid epidemic in the US remains severe, the number of covid deaths in Texas reached a new record high. After the interest rate meeting, Fed Chairman Jerome Powell pointed out that more fiscal policies are needed to stimulate the economy, and the idea of hiking rates is completely off the table. On the other hand, US President Trump tweeted the idea of ​​postponing the November elections, but congressmen from both parties opposed the idea, and he does not have the relevant power to actually postpone the elections. Finally, it is worth mentioning that the US dollar index has fallen and reached its lowest level since May 2018, while the gold price has hit a record high. The US will be releasing the latest employment figures, market expects that the Nonfarm Payrolls in July will fall to 1.635 million.

euroEurope

European stock markets slightly underperformed. The UK, French, and German equities fell between 3.57% and 5.52% over the past 5 days ending Thursday, lagging behind global markets. As the epidemic continued to ravage across the globe, the European Central Bank required European banks to suspend dividends and stocks buybacks before the end of 2020 in order to maintain financial stability. Germany’s GDP fell by 10.1% in 2020 Q2, while the Eurozone’s GDP fell 12.1% QoQ, both setting new record lows. The Eurozone consumer price index in July rise 0.4% YoY. The Eurozone retail sales data will be announced next week.

chinaChina

A-shares performed better this week, with the CSI 300 Index rising 4.2% over the week; Hong Kong stocks were slightly worse, falling 0.45% over the same period. China announced satisfactory industrial profits in June, which rose 11.5% YoY. As for the official manufacturing index in July, it came in at 51.1, which was higher than the previous figure of 50.9; However, the July non-manufacturing index was 54.2, slightly lower than last month’s figure of 54.4. On the other hand, the HKD continued to show strength, and the HKMA intervened in currency market twice on Thursday, selling more than 4.6 billion HKD in total. China will announce its July data on imports and exports, foreign reserves, and Caixin manufacturing PMI next week.

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자산 관리 계획
29 July, 2020
Bond Investment Strategies- Understanding Different Bond Instruments

Want to learn more about investing in the bond market?
There is a wide range of investment vehicles for bond investing. What are their characteristics? What should we pay attention to?

3 main ways to invest in bond market

There are three mainstream instruments to invest in bond market today, namely direct bonds, bond funds and bond ETFs. Direct bond refers to directly holding the bonds issued by an entity, corporate or sovereign. Holding direct bonds is basically equivalent to being a creditor of the company, the bond holder has the right to directly claim the principal from the issuing company. One might be more familiar to instruments like the “i-Bond”, which is a retail bond issued by the Hong Kong Government through the Hong Kong Stock Exchange.

As for bond funds, they are funds that invest in the bond market, usually holding direct bonds. Since bond funds can gather more capital, they can hold more bonds in its portfolio, achieving better risk diversification. In addition, the bond funds also have different investment objectives, some invest by region, others by type or theme.

The last of the bunch is bond or fixed income ETFs. For those who are unfamiliar with the term “ETF”, its long-form is Exchange Traded Funds, ETFs tend to hold securities with the same composition as its corresponding index to track the performance of the index. One of the biggest advantages of using ETFs is the existence of the secondary market, so you can buy or sell them on the listed exchange. The Hong Kong Stock Exchange listed Tracker Fund (2800) is one of the best-known equity ETFs that tracks the performance of the Hang Seng Index. Similar to the equity ETFs, fixed income ETFs operate in the same way, holding a basket of bonds, instead of stocks, to track its bond index. However, currently there are less than 20 bond ETFs listed on the Hong Kong Stock Exchange.

Minimum investment amount

First off, the minimum investment amounts can differ a lot. The minimum investment amount for direct bonds is relatively higher. For common corporate bonds not issued through the Hong Kong Stock Exchange and denominated in US dollars, the usual minimum investment face value is USD 200,000, with a very minority of them at USD 100,000. For HKD denominated bonds, the minimum investment face value would be HKD 1 million. If you compare it to HK listed stocks, where the minimum investment amount mostly ranged between Hong Kong dollars of several thousand or several tens of thousands, the entry barriers for investing in direct debt is much higher. Of course, the barriers to entry for retail bonds issued on the Hong Kong Stock Exchange could be lower, e.g the minimum investment amount for “i-Bond” is only HKD 10,000.

Barring retail bonds issued on the Hong Kong Stock Exchange, the entry barriers for bond funds and bond ETFs are relatively lower. Take bond funds as an example, for fund investment in retail banks, the minimum investment amount for a one-off investment ranges from around HKD 10,000 to HKD 50,000. As for the bond ETFs, the ones traded on the Hong Kong Stock Exchange also have a similarly low entry barrier, with the minimum lot averaging a few thousand HKD, which makes it one of the less demanding tools for novice investors.

Risk diversification

Secondly, the risk diversification levels are different. Direct bonds are only single bonds; while bond funds and bond ETFs hold a basket of bonds, with the number ranging from tens to hundreds of bonds, so they tend to achieve better risk diversification. Of course, investors could design a bond portfolio to achieve diversification in theory, but the investment amount of this approach will be much larger. As mentioned above, a straight bond would require a minimum investment amount of around HKD 1 million, a bond portfolio of 100 bonds would require around HKD 100 million, whereas bond funds or bond ETFs would only need a minimum of a few thousand HKD.

Maturity

The third point of focus is maturity. Most direct bonds have a clearly defined maturity, as long as there is no default or other special circumstances, investors can expect to receive the principal on the bond maturity date. On the contrary, bond fund investors could not predict the amount received at the time of redemption. As there is no maturity date, the bond fund will continue to reinvest the principal of its matured bonds. The net asset value of the fund changes daily, although investors can gain from the dividend pay-outs, there is no guarantee of a price gain at the time of redemption. Bond ETFs are essentially the same as a bond fund and it is exposed to the same risks as a bond fund.

Liquidity

The last point of focus the difference in liquidity. In terms of transaction speed, bond ETF is the fastest, a transaction can be done in mere seconds. In addition, trading on the Hong Kong Stock Exchange system, although it takes two trading days (commonly known as T+2) for cash settlement, investors could buy other securities listed on the Hong Kong Stock Exchange immediately, using the funds from selling the bond ETF. This is also known as receivable funds, which can be used for trading before the actual settlement date. In addition, issuers are usually required to bid based on the value of the investment vehicle, so the liquidity risk is relatively low with a tighter bid-ask spread.

In contrast, although direct bonds can also be traded in the secondary market, the selling amount is not usable before the settlement date, unlike receivable funds which can be used for trading on the Hong Kong Stock Exchange. Banks or other financial institutions usually need at least one working day to settle the sold amount. More commonly, bonds are traded on the OTC market, where they might be thinly traded, having sparse bids in the market, which gives rise to a greater liquidity risk. Even if there are open bids, the bid-ask spread might be rather large.

Bond funds are fundamentally different in liquidity terms, as transactions are not conducted in the secondary market, but only via subscriptions and redemptions between investors and the fund companies. Barring any special circumstances, the subscription and redemption of open-end bond funds should 100% be done, so the liquidity is quite adequate. But one should also note that you would not know the actual unit price for subscription and redemption, which is only known after the transaction, and the whole redemption process often takes two working days.

After comparing the three instruments, you may have a deeper understanding of investing in the bond market. Next up, we would further look into bond or instrument selection, and determine which bonds would best benefit from a given situation.

bond chart

자산 관리 계획
29 July, 2020
Bond Investment Strategies

In recent years, there has been growing interest for bonds in the investment market and we believe two main reasons for this.  

Seizing Investment Opportunities in Bond Market
Firstly, there is the risk of the economic recession and heightened volatility in the equity market. By investing in the bond market, investors can diversify risk, and potentially reduce the volatility in the investment portfolio. Secondly, investors see the US entering a rate cut cycle. With rates going further lower, bonds will likely gain via price appreciation.


Mixing asset classes to improve risk-adjusted returns
Regardless of the extent of recession and the rate cut cycle, allocating a portion of the portfolio to bonds likely achieves the two goals above. First off, let’s see how investing in bonds can bring risk diversification to the portfolio. Traditionally, the correlation between the performance of bonds and stocks is lower than that of other assets, even showing negative correlation at times. Take the Bloomberg Barclays US Treasury Bond Index and the S&P 500 Index as an example, as at the end of June 2019, the 30-day correlation coefficient between the two is -0.44, out of a range of -1 to +1. A negative correlation means that when one asset falls, the other tends to rise. Thus, when the equity market crashes, bond prices will likely see gains simultaneously, which could hedge excess volatility in the portfolio. In addition, bear in mind that both bonds and stocks generate total return via coupons and dividends. Over a longer timeframe, investing in a negatively correlated hybrid portfolio will likely generate higher risk-adjusted returns.


Investment opportunities with rate cut expectations
Next, we will dive into why rate cuts in the US benefit bonds. Generally speaking, changes in the US interest rates are decided by the Federal Reserve adjusting the monetary policy, which guides market rates by limiting the upper and lower bounds of the local bank rates. Short-term rates are more sensitive to changes in the Fed fund rates, when the Fed cuts interest rates, short-term market interest rates tend to fall; long-term interest rates on the other hand are also affected by other factors, positively correlated to factors such as economic growth and inflation expectations. When the expected future investment return or inflation rate is higher, the market would require a higher interest return before they are willing to lock the funds in bonds. Historically, U.S. Treasury interest rates tend to fall in the rate cut cycles and rise during the rate hikes, as the central banks will implement interest rate cuts when growth is slowing, long-term interest rates often move in line with the interest rate cycles.


Falling interest rates makes bonds attractive
So how exactly is changing interest rates related to bond prices, one might have heard that the two move in opposite direction. When market interest rates rise, bond prices fall, and vice versa. While the gain or loss in bond prices can be calculated, to further simplify it, investing in bonds means you give up the potential return of the deployed capital if it was invested in other assets, which is the opportunity cost. Given a fixed coupon rate of the bond, when the market interest rate (floating rate) rises, the opportunity cost will rise, the attractiveness of holding this bond will decrease, the market will require this bond to provide a higher interest rate to compensate for the lost opportunities, which causes the bond price to fall; on the contrary, when the interest rate falls, the market would ask for a lower bond interest rates, existing bonds will become more attractive. Therefore, Fed rate cuts tend to be beneficial to bond prices.

All in all, investing in bonds on one hand improves the risk-adjusted return of the investment portfolio; on the other hand, it provides an opportunity to capture gains from potential central bank rate cuts. We shall look into the details of bond investment options and any other important matters in the next session.

회사 관련 뉴스
21 July, 2020
COVID-19에 따른 업무처리 영향 제한적

COVID-19 따른 업무처리 영향 제한적

해리스 프레이저 그룹은 고객과 비지니스 파트너에게 최고의 서비스를 제공하기 위해 항상 최선을 다하고 있습니다.

홍콩에서 지난 며칠간 COVID-19 확진자가 늘어났고, 지역 감염의 리스크가 높아진 상황입니다.

그래서, 우리 그룹은 고객 서비스 퀄리티 유지와 임직원의 안전한 업무 처리를 위해, 교대 재택근무 및 출퇴근 유연제를 도입했습니다.

COVID-19의 위협 속에서도 서비스 퀄리티는 변함없이 유지될 것입니다. 그러나, 요청 사항 처리에 있어 원수사의 처리 지연 등이 발생할 수도 있음을 너그러이 이해 부탁드리겠습니다.

급한 상황의 경우, 담당 컨설턴트나 영업 담당자에게 직접 연락하시길 권고 드리겠습니다.

불편함을 끼치지 않기 위해 최선을 다하겠습니다.

건강 유의하시길 바랍니다.

 

해리스 프레이저 그룹

금융 시장 리포트
17 July, 2020
Weekly Insight July 17

Weekly Insight July 17

usaUS

Although the global covid epidemic is still severe, positive news from vaccine research progress, together with surprisingly good US corporate earnings pushed US equities upwards. Over the past 5 days ending Thursday, the S&P and the Dow rose 2% and 4% respectively, while the NASDAQ slightly retreated 0.7%. According to US pharmaceutical company Moderna, the clinical results of its covid vaccine showed progress, with all patients producing antibodies after the injection, the news lifted spirits in the investment market. On the other hand, the latest corporate earnings period for US equities have just started. Among the 40 companies that have announced corporate earnings, more than 80% beat market expectations. In particular, more than 90% of reporting banks and financials beat analyst estimates, the overall results were fairly satisfactory. In addition, the US House of Representatives Speaker Nancy Pelosi mentioned that the Congress will likely pass another epidemic relief bill in the next few weeks, further improving market sentiment. The US will announce the Markit Manufacturing PMI next week.

euro Europe

European equities performed well over the past 5 days ending Thursday, the UK, French, and German equity indexes all rose more than 3%. The European Central Bank (ECB) kept interest rates and monetary policy unchanged after the interest rate meeting. ECB chair Lagarde said that the recovery speed and scale in the region remained very uncertain, so the ECB might need to fully utilise the Pandemic Emergency Purchase quotas. On the other hand, the European Union will hold a leaders’ summit during 17-18 July and discuss the 750 billion Euro economic recovery plan, Lagarde expects the EU Recovery Fund to be approved. The Eurozone will announce the Markit Manufacturing PMI and Consumer Confidence Index next week.

chinaChina

The China and Hong Kong markets saw large fluctuations over the week, the A-share market in particular experienced a sharp correction after an earlier surge, surprising markets. The CSI300 index reached a 5-year high of 4800 points at one point but subsequently fell, the HSI also retreated to the 25,000 level. As the total margin balance in China increased sharply and was close to 1.4 trillion yuan, both the China Securities Regulatory Commission and the China Banking and Insurance Regulatory Commission voiced concerns over off-site funding and indiscriminately increasing leverage, speculation in the market subsequently cooled. As for economic data, China's latest 2020 Q2 GDP beat market expectations, recording a YoY growth of 3.2%, bouncing back from the contraction of 6.8% in Q1. China will announce the LPR interest rate next week.

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Harris Fraser Message (KR)

‘청렴, 헌신 및 정직’은 항상 Harris Fraser Group의 DNA에 내재된 가치였습니다. 팬데믹의 3년 동안 우리는 우리와 가치와 신념을 고수했습니다. 수년에 걸쳐 수많은 금융 위기와 경제 혼란 속에서도 변함없이 고객과 함께 손을 잡고 앞으로 나아갔습니다. 우리는 시장에 대한 깊은 이해와 전문성을 바탕으로 고객의 부를 보호하고 성장시키며 함께 성장함으로써 금융 및 경제 위기를 연이어 극복할 수 있었습니다.


Harris Fraser는 처음부터 항상 고객의 훌륭한 동반자였습니다. 2020년, 우리는 국제 부동산 투자 및 이민 자문 서비스를 강화하기 위해 두 가지 새로운 비즈니스 라인을 설립하여 고객에게 자산을 계획하고 미래를 위한 전략을 세울 수 있는 더 많은 옵션을 제공하였습니다. 포스트 코로나 시대에 우리가 계속해서 다른 국가로 사업을 확장하고 소중한 고객과 함께 나아갈 수 있기를 바랍니다.

 

금융 시장 리포트
17 July, 2020
Emerging market – Opportunities amidst the epidemic

Undeterred by the resurging infection figures, emerging markets continued to gain over the month, the MSCI Emerging Markets Index gained 6.96% in June.

The epidemic continued to spread across emerging markets, with major EM economies like Brazil, Russia and India claiming the next 3 places for total covid cases after the US, yet local governments still continued to proceed with their original reopening plans. With the second wave outbreak underway, one might be concerned over its economic impact on the recovering economy. As repeatedly mentioned, with the epidemic as an example, emerging markets will continue to face extended external risks, which would serve as the main concern over investing in the region.

Betting on a gradual recovery in the global economy, emerging markets pose as a more attractive alternative with stronger rebound potential, considering the developed markets’ higher valuation. If the market sentiment continues to improve and the epidemic situation does not significantly worsen, we could possibly see EM outperform DM in the short to mid-term. Among emerging markets, we continue to see Asia markets as a better option over Latin America, prioritizing the Vietnam market in particular for its stronger secular growth.

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금융 시장 리포트
16 July, 2020
Japan – Restarting the economy

The Japanese economy had a poor showing in 2020 Q2 as expected, but the stock market remained relatively resilient, highlighting the reality of a disjointed investment market and physical economy as a symptom of the post-2008-QE world. Over the month of June, the Nikkei 225 Index gained 1.88% (1.86% in US$ terms) and the TOPIX Index slightly lost -0.31% (-0.33% in US$ terms).

The epidemic situation stayed relatively steady. Even though there are sparse cases in mainly in the metropolitan regions like Tokyo, the government saw limited concerns over another major outbreak, reopening continued and economic activities gradually picked up. However, with the pandemic ongoing on the global scale, key sectors like tourism and retail continued to suffer, May tourist figures even logged a staggering 99.9% drop YoY.

While the investment market should continue to receive support from the Bank of Japan, as outlined by weak leading economic indicators, the real economy is not expected to significantly improve in the short to mid-term. Thus, we will continue to take a neutral view over the market.

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