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Five insights in five minutes

Five in Five: Wealth Connect, ESG, climate-tech, dollar, Evergrande
17 September 2021

    Wealth Management Connect

    China’s mid-autumn festival is a time for uniting with family and friends. Financial regulatory bodies wanted to celebrate in their own way last week by announcing the implementation details of the Wealth Management Connect Scheme, which will join eligible mainland Chinese residents to investment products in Hong Kong, and vice versa. Last year, mainland investors only accounted for one-tenth of the massive 4.5 trillion US dollars parked in Hong Kong’s wealth management industry. This proportion is bound to increase, as suggested by a recent HSBC survey revealing that more than four in five eligible mainland residents are interested in opportunities offered by the Connect scheme. Many are no doubt attracted to the global diversification of portfolios that Hong Kong’s numerous international offerings can bring, as illustrated in the chart below. Even just looking at money run directly in Hong Kong, over half is invested in securities outside of greater China. In the asset management industry, diversity matters in so many different ways.

    Ways to play: Asia equities, Hong Kong equities, China equities

    Wealth Management Connect  

    Sustainable financing

    Like a kid at a candy store, Five in Five relishes new responsible investing data – and HSBC’s 2021 Sustainable Financing & Investing Survey, which measured ESG sentiments at more than two thousand companies and investors, is a doozy. It revealed, for example, that over half of issuers already believe their businesses are being affected by climate change, most notably those in the Americas, with oil, gas, coal, chemicals and surprisingly telecoms, being the most affected sectors (at over 70 per cent of respondents). No wonder almost 90 per cent of companies surveyed said they expect to change their business model and capital allocation towards activities that promote positive ESG outcomes in the next two years, ramping up to 95 per cent three years after that. Why are surveys such as this of interest to investors? Because they contain on-the-ground insights that cannot be found in public data. And when 40 per cent of companies say they need a lot of financial help to meet their sustainability goals, that equals a whopping great investment opportunity.

    Ways to play: ESG strategies, global equities, global credit

    Sustainable financing  

    Climate-tech

    Powered by full-thrust growth in Asia in particular, the aviation industry saw a nearly three-fold increase in flight volumes between 2000 and 2019, according to the International Energy Agency. Pre-pandemic, aeroplanes were producing more carbon emissions than Germany. Finding greener ways to power flight is clearly essential to mitigating climate change. Yet the route to decarbonise air travel emissions remains foggy, with the power required currently too much for the battery approach being adopted on the ground. Of course, a problem for one is opportunity for another. Last week for instance, United Airlines and industrial conglomerate Honeywell International, made a joint multimillion dollar investment in a cleantech start-up developing a new sustainable aviation fuel from biomass such as forest and crop waste. With capital now fully behind the push to address climate change, innovation will only grow. Often the best ideas are not found on public stock exchanges though, leaving private equity and venture capital as alternative routes in for investors. As per the chart below, the former has rewarded investors already this year.

    Ways to play: Climate tech, venture capital, private equity

    Climate-tech  

    Ageing dollar

    Happy 50th birthday Bretton Woods! The global system, which allowed the on-demand exchange of US dollars for gold, ended in August 1971. At that moment, the share of the greenbacks within worldwide central bank reserves was above 80 per cent. Half a century later, data provided by the International Monetary Fund show that the share of dollars has dipped below 60 per cent, with a five per cent decline over the past four years alone. Meanwhile, the renminbi has risen from one to slightly more than two percent of reserves since 2016. Not so impressive, but promising. Reasons to hold China’s currency continue to grow. There is the asset-liability management motivation for exporting countries as well as those receiving Chinese loans. The investment case is also a factor, as sovereigns seek higher returns and diversification. And given the outlook for yields, expect a continuing high pace of inflows from the official sectors into the Chinese bond market for many years to come.

    Ways to play: China credit

    Ageing dollar  

    Evergrande

    When a property company has debts equal to two per cent of a country’s output, over a thousand developments underway employing almost four million workers, liabilities spread across more than a hundred banks and a similar number of non-financial institutions, investors are allowed to be nervous. Owners of Evergrande bonds are already in the red. For everyone else, it’s now about calculating risks. Here, some perspective is useful. Total liabilities of Evergrande Group come to 6.5 per cent of liabilities of the entire Chinese property sector. Less than five per cent of the latter are financed via off-shore bonds. What also matters is the orderliness of any potential restructuring – if one eventuates. China has form here, with currently the largest and most complicated court-led restructuring in the country – HNA – proceeding smoothly, albeit slowly. Beijing’s ‘market-oriented’ approach to the sale of HNA assets may help with recovery rates, which at current prices imply about a 70 per cent haircut at Evergrande, but it’s impossible to forecast these for certain. There is a positive spin for ESG investors however: if China’s biggest homebuilder downs tools for a while, nationwide cement demand is estimated to fall by one percent.

    Ways to play: China equities, Asia equities and credit

    Evergrande 


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