HSBC Life HK sees alpha in Chinese equities via active strategy
HSBC Life Hong Kong expects policy support from the Chinese government to be material in order for it to seize selective opportunities in Chinese equities, according to its chief investment officer William Chan.
The insurer sees opportunities in active stock selection and is working with its asset manager HSBC Asset Management to assess an active mandate for investments in both A shares on the Chinese mainland and H shares in Hong Kong.
“A very good way to make money from financial investment is to identify points when people are overly bearish or overly bullish, and to lean against such excess sentiment,” Chan told AsianInvestor, noting that the market is overly bearish on China.
“One factor that we are considering in our China exposure, for example, is the probability for more aggressive, more constructive policy measures from the government to boost growth, and that could provide support for earnings outlook for Chinese shares,” he said.
Chan believes the performance of Chinese assets — both public and private — is driven by two forces. On one hand, there is the depressed consumer sentiment, the real estate sector, and the long-term headwinds from an increasingly aging population.
On the other hand, one must take into account policy support from the government. Economic outcomes would hinge a lot on the timing, strength, and effectiveness of all the stimulus measures from the government, Chan said.
“We expect it will be quite material, quite significant, with the fact that actually China or more broadly Asia assets have been offering very cheap valuations,” he said.
On Tuesday, China cut the five-year loan prime rate (LPR) by 25 basis points to 3.95% in its biggest-ever reduction in the benchmark mortgage rate, in order to stimulate the distressed property sector and strengthen weak business confidence.
FROM PASSIVE TO ACTIVE
HSBC Life Hong Kong used to have mostly passive indexation mandates for Asian equities, with the aim of capturing broad market returns in the long term.
Seeing selective opportunities from both A and H shares this year, the insurer is exploring an active mandate to enable stock selection as well as the flexibility to shift the relative weighting between H and A shares.
“We believe it is quite a good angle to get some alpha return,” Chan said. “There could be plenty of alpha creation opportunities.”
He noted that alpha return is a “desirable” addition to beta return for insurance companies, and it tends to come when there is market mispricing.
The CSI 300 has been down for three consecutive years from 2021 to 2023, slumping 34% from 5,211 points at the end of 2020. Year to date, it has gone up by 2%.
The Hang Seng Index posed a similar trend. It is still on the downturn, with a 1.4% decrease year to date.
HSBC Life Hong Kong also has some exposure to China’s private equity market. Chan noted that its private equity managers are keeping an eye out for opportunities, depending on the availability of fund vehicles to invest in China’s long-term growth.
Based on the insurer’s expectations of a possible rate cut later this year and a potential recession, it is moderately underweight listed equity, and overweight alternative and fixed income assets.
However, it still sees opportunities in the global equity market.
Despite the expensive valuation of the so-called “Magnificent 7” US tech behemoths, Chan believes their long-term growth is still very sound. But its steep valuation adds to higher possibilities of volatility.
“But if, for example, we see a material correction in the tech sector, I would look at that as good entry points rather than turn bearish on them,” Chan said. “So long term, I’m very positive.”
Right now, Chan holds the view that the market is too optimistic about early rate cuts by the US Federal Reserve, a soft landing, as well as there being no recession.
“But if we have cumulative evidence that the Fed will deliver more aggressive-than-expected rate cuts, then it makes sense for us to be more constructive, even overweight equities, pre-emptive of a rebound from recession-driven correction,” he said.
MANAGING RISKS
Aside from monetary policy uncertainties, Chan noted geopolitical risks, which tend to create temporary market corrections and provide entry opportunities for tactical positions.
Since the insurer believes the best risk-adjusted return is offered by fixed income under current market conditions, the biggest risks for it are liquidity, credit, and duration risks.
Hong Kong is set to introduce a risk-based capital (RBC) regime for insurers by mid-2024, which necessitates capital reserves proportional to mark-to-market risks.
Hence, it is a good time for insurers to add duration to their fixed income exposure at this part of the cycle to close the duration gap between assets and liabilities, Chan said. Such a mismatch is subject to a capital charge under the new RBC regime.
Regarding credit risk, HSBC Life Hong Kong has the view that high-grade fixed income — single A minus or above — provides better risk rewards than high-yield or low-grade fixed income investments.
Since currency risk charges tend to be high under RBC, the insurer hasn’t taken many such risks historically, and will continue the approach at this point of the cycle.
HSBC Life Hong Kong’s assets are denominated in US and Hong Kong dollars. Chan expects the dollar strength to continue for some time, partly because inflation in Europe is coming down faster than in the US, and so the Fed might not be ahead of other central banks when it comes to easing monetary policy.
“Once we see a clearer picture regarding the timing of Fed easing or even once we see the first rate cut, it might then be a better timing to consider [adding positions in local currency emerging market assets],” Chan said.