US

The market still expects more stimulus from Congress, and the recent increase in merger and acquisition activities helped improve market sentiment, driving the rebound in the US stock market. Over the past 5 days ending Thursday, the Dow, NASDAQ, and S&P 500 indexes gained 2.19%, 1.95%, and 0.83% respectively. With the US elections just three weeks away, the market is still concerned if there will be major events affecting the two candidates' prospects. Incumbent US President Donald Trump returned to work in the White House office on Wednesday after undergoing medical treatment, but countrywide polls still show Trump's support lagging behind Biden. The Commission on American Presidential Debates announced that the second presidential debate will be held in video format on the 15th of this month. As for stimulus matters, Trump called off stimulus talks with the Democrats earlier, before adding that he is still willing to support relief measures such as ones for the airline industry, and that he remained open to a larger stimulus package. The US will release CPI, retail sales and other data next week.

EUROPE

European equities followed the rebound in US markets, with the UK, French, and German stocks gaining 1.29% to 2.78% over the past 5 days ending Thursday. The market is concerned about the resurgence of outbreaks in Europe. Even with a new round of lockdown measures, the number of daily cases in many European countries is still at record highs, governments and the European Central Bank said they will provide more support to the economy. That said, European regulators admitted that it is “unlikely” that the vaccine will be available before the end of the year. As for the Brexit trade talks, it was reported that the UK will withdraw from the talks if an agreement is not reached by next week. European Council President Charles Michel also mentioned that the Brexit negotiations have reached a “critical moment”. Next week, the UK will announce the unemployment rate and the Eurozone will release the ZEW economic sentiment index.

CHINA

After the weeklong National Day holiday in China, RMB strengthened, the CNH USD rate even closed in the 6.7090 level at one point. The appreciation of the RMB drove the China A-share market up after the long holiday, with the CSI 300 index rising over 2% in a single day. Alibaba's Ant Group will be listed in two markets soon, raising US$35 billion, this will be the largest IPO in the world since Saudi Aramco’s listing. Next week, China's CPI, PPI, and import/export data will be released.

Harris Fraser Group was honored the “Partner Employer Award” by The Hong Kong General Chamber of Small and Medium Business in recognition of  its support for local graduates by providing them with jobs and internships.

The "Partner Employer Award" is organised by the Hong Kong General Chamber of Small and Medium Business Limited. It aims to commend the efforts of enterprises in actively offering internship to students and employment opportunities to the disabled, ethnic minorities, rehabilitated persons, re-trained persons and retirees etc.

The Companies Registry has been awarded the 2020 “Partner Employer Award” in recognition of our contribution in offering internship to students. 

Weekly Insight September 25

US

With no signs of improvement in the global epidemic, and US officials expressing worries over the progress of economic recovery, the US stock market continued its downtrend. The Dow, the S&P 500 and the NASDAQ were down between 2.18% and 3.89% over the past 5 days ending Thursday. US Federal Reserve Chairman Jerome Powell said that the progress of the economic recovery remains "highly uncertain", as evidenced by the elevated number of unemployment claims. In addition, several officials continued to call for additional fiscal stimulus. It was reported that the White House and Congress are planning to restart the stimulus talks, and the Democratic Party is ready to draft a $2.4 trillion stimulus package, but the new downsized package is still far above what the Republican Party would accept. Next week, figures on unemployment rate, ISM manufacturing index and consumer confidence index will be released.

EU

Europe equities continued to fall, with the UK, French, and German indexes losing 3.75% - 5.49% over the past five days ending Thursday, amid worries over the reintroduction of lockdown measures due to the worsening epidemic in Europe. In the UK and France, both governments announced new restrictions in response to the new daily infection record highs. In addition, the European Central Bank President Christine Lagarde states that it will increase the monetary policy stimulus if necessary. Earlier, the Bank of England (BoE) stated that a negative interest rate policy in the future is being considered. The announcement put the Pound under pressure, but the BoE Governor Andrew Bailey explained that market participants should not read too much between the lines, stabilizing the Pound in the short term. Next week, the Eurozone will release CPI and unemployment figures.

CHINA

Weighed down by the HSBC-led banking sector, Hong Kong stocks continued to fall over the week, with the Hang Seng Index losing nearly 5% over the week; China A-shares also fell, the CSI 300 Index was down 3.53% over the same period. The market expressed concern over the Evergrande Group, as documents and screenshots related to its rumoured restructuring were circulated on the Internet recently. The Group subsequently issued a statement saying that the information was fabricated and defamatory, and had reported the case to the authorities. On the other hand, FTSE Russell announced the inclusion of Chinese government bonds into its flagship index, starting from October next year, which is expected to result in an inflow of hundreds of billions of US dollars into the Chinese onshore bond market. Next week, China will release various data including the official manufacturing PMI.

By executing an arbitrage carry operation with your newly minted capital, you can also create your own "passive income" with bond leveraging.

The two trends that help

There are two notable trends in the market in recent years: 1) rising global property prices, especially in Hong Kong, and 2) falling global interest rates. This makes arbitrage operations via mortgage financing more favourable, as the higher property prices result in a larger amount of property refinancing available; and the lower interest rates require less interest payments, leaving more room for carry arbitrage.

Releasing your hidden capital

How can we kick-start the engine without much cash on hand? Recently, there has been much talk on "mortgage refinancing". Mortgage refinancing is like magic, releasing your hidden capital that investors may have looked over. Doesn’t matter if we utilize it for investment, or for another property purchases, utilizing them give us more opportunities for wealth growth.

How do we create passive income

So how do we come around creating passive income? With the low cost of financing, we can choose assets that are relatively price-stable, but not necessarily high-yielding, to generate interest income according to your own suitability. By utilizing the low-interest capital from mortgage refinancing, and investing it in higher-yielding assets, we can capture the interest rate differential, leaving us with a net return as our passive income.

Top Investment Choices for Mortgage Refinancing

Bonds, bond funds, real estate investment trusts, and high yielding stocks are some of the more popular income generating assets in the market. Among them, bonds and bond funds are more popular because of their bond nature, as they are generally dividend/coupon paying and have a lower price volatility than stocks; these two features fall in line with the requirements of mortgage refinancing, making them the prime choice for such purposes. Of course, when deciding on any investment, one has to consider various risk factors and one's own risk appetite, which might not be fully covered in this article.

Low interest rates makes carry trades with capital appreciation possible

As for the interest rate outlook, none expects the US to raise interest rates in the near future, and the current low interest rate environment is expected to continue.  This will create more room for carry, and lower interest rates will also benefit bond prices. If bond prices rise, investment returns could further increase, making capital appreciation possible even in the carry trade.

All in all, with the low interest rate environment resulting in less opportunities in the fixed income sphere, utilising carry arbitrage via mortgage financing, we can generate passive income to improve wealth appreciation, which is one of the strategies we can opt for in the current environment.

August was a relatively calm month for the Japanese market, equities continued to climb with the help of the dovish central bank. The Nikkei 225 Index gained 6.59% (6.61% in US$ terms) and the TOPIX Index surged 8.16% (8.18% in US$ terms) over the month.

The biggest news in the month is the Japanese PM Shinzo Abe’s announcing to step down from the country’s top position at the end of the month, citing declining health conditions as the primary consideration. Markets were initially concerned about the implied uncertainty due to the vacuum of power left behind in Abe’s wake, but Liberal Democratic Party elders will adopt an emergency procedure, which prevents a full party vote, likely securing a continuity of the Abe policy for the remaining term before the national polls in 2021.

The biggest question the new PM would have to answer is how the country can exit the covid crisis. When Shinzo Abe was still the PM, he was repeatedly criticised for being overly passive in fighting the covid, which ravaged across the Japanese economy and resulted in one of the most serious recessions ever. With the future of the delayed Olympics still uncertain, the upcoming leader would have to come up with a more solid framework to rejuvenate the Japanese economy. With issues and concerns unanswered, we would refrain from investing in the Japanese market.

The Bloomberg Barclays Global Aggregate Bond Index were down 0.15%, US Investment Grades lost 1.38%, while Emerging Markets US dollar Bonds and US High-yield bonds gained 0.54% and 0.95% respectively.

At the annual Jackson Hole Economic Symposium, Fed chair Jerome Powell gave a speech outlining the upcoming policy direction of the Fed. According to him, the Fed will shift the policy target from an inflation based one, to an employment and economy driven one, where inflation could go above the long term target of 2% without any reaction from Fed. Market interprets the statement as a guarantee for a low interest rates for an extended period, resulting in a much lower risk of rate hikes in the meantime, giving additional downside protection for bonds.

Moving forward, quality remains a key aspect with the difficult macroeconomic environment for businesses continuing, and we remain positive on quality Asian bonds with their better yield to risk trade-off due to the better operating environment in general. Investors should also keep governmental support in mind when selecting fixed income names, as these could cover potentially weaker businesses. As they are expected to expire sometime in the future, this could potentially expose investors to unnecessary risks.

Weekly Insight September 18

US

The US stock market remains range-bound over the short term, and the confidence in the technology sector has yet to fully recover. Over the past 5 days ending Thursday, the NASDAQ underperformed with a 0.09% drop, while the Dow and S&P 500 rose 1.33% and 0.53% respectively. On the epidemic front, the global covid tally surpassed the 30 million mark, and some parts of Europe are showing a resurgence of the epidemic. US President Donald Trump said that the new covid vaccine would be available to Americans as early as October this year. On the other hand, the US Federal Reserve kept interest rates unchanged after the FOMC meeting, and hinted that low interest rates will continue at least until the end of 2023. Fed Chairman Jerome Powell noted that the US economic recovery is progressing faster than expected, but economic activity may still slowdown in the future, such that the economic outlook remains uncertain. Chairman Powell is scheduled to testify at three congressional hearings, along with US Treasury Secretary Steven Mnuchin on Sept. 22, which would also involve discussions on the epidemic response. Next week, the US will release manufacturing and services PMIs for September.

Europe

European stock markets went sideways, the UK, French, and German equity indexes gained between 0.04% and 0.30% over the 5 days ending Thursday. The Bank of England voted unanimously to keep the Bank's interest rate and asset purchase targets unchanged, but mentioned that negative interest rates requires further discussion, especially in the face of uncertainties in the job market and the general economy. As for Brexit trade deal negotiations, there has been some positive news. EU Chief Brexit Negotiator Michel Barnier told the EU 27 ambassadors that he still believes that both sides can reach an agreement, the market will keep an eye on that before the October deadline. Next week, the Eurozone will release the manufacturing PMI.

China

Both China A-shares and Hong Kong equities stayed mostly flat throughout the week, but A-shares surged on Friday, the Shanghai Stock Exchange index in particular posted its biggest one-day gain in a month, tallying gains of 2.38% over the week, while the Hang Seng Index slightly fell 0.02%. China's economic data showed a quickening recovery, with total retail sales returning to positive YoY growth in August, industrial production accelerated on a YoY basis, and fixed investment also improved YoY. Supported by foreign investment inflows, the offshore CNH/USD exchange rate rose to a 16-month high. It was also reported that China may consider raising its clean energy target in the 14th Five-Year Plan, drawing market attention to the relevant sectors. Next week, China will release the latest Loan Prime Rate (LPR).

Vietnam, the market in focus last month, surged more than 10% over the month of August. We saw the market slump as an overreaction, the epidemic outbreak in the country was relatively contained as the government took swift action, which should lead to a smooth economic recovery in the country. With the global economy gradually exiting the virus induced recession, the recovery momentum should provide additional boosts to the externally reliant emerging market economies.

However, as the US elections approaches, we would take a more cautious approach towards equity markets as uncertainties mount. With both candidates not overly clear on their policy and focusing more on the rhetoric wars, political uncertainties remains elevated for EM equities. For prudency purposes, investors could consider trimming down riskier holdings in the meantime, as the relatively limited upside does not fully justify the downside risk.

Although the covid have seemingly re-emerged in several European countries like Spain and France, we believe that strict lockdown measures like the ones enacted in February are unlikely to be adopted this time around. With the overall sentiment staying on a positive note, markets regained some lost ground. However, other issues such as a lack of progress in Brexit talks serves as a drag factor, which are expected to further hinder the European recovery.

Also, fundamentals do not really support the continued surge in markets, as sentiment indicators continue to stay on the weaker side, and various PMIs are also slumping after the earlier surge. This possibly highlights a slowdown in the recovery, aligning with the resurgence of the epidemic. Given the fundamentally weaker economy, already hit hard by the epidemic, further plagued with additional issues such as Brexit and strained foreign relations, we see the current situation in Europe as less than ideal, we would not consider overweighting in European equities in the short to mid-term, unless there is material change in the economic outlook.