The Daily Update - Hong Kong. Is there any value?

Today marks 70 years of Communist Party rule in China. At the National Day parade, where troops lined up chanting: “Follow the party! Fight to win! Build exemplary conduct!”, President Xi Jinping promised that “no force can shake the foundation of this great nation``. Adding, “No force can stop the Chinese people and the Chinese nation forging ahead.” This comes in the wake of the current Sino-US trade war and political unrest in Hong Kong. On the latter, we heard of further protests across Hong Kong today, with the government cancelling the city’s celebratory fireworks amid safety concerns and forbidding the Civil Rights Front's organised rally. 

Last month Fitch downgraded Hong Kong’s long-term foreign currency rating to AA (negative outlook), in-line with Moody’s and one notch lower than S&P’s AA+ rating, the last time Fitch downgraded its rating for Hong Kong was back in 1995, to A+. Fitch said: "Months of persistent conflict and violence are testing the perimeters and pliability of the 'one country, two systems' framework that governs Hong Kong's relationship with the mainland". Adding that, "The gradual rise in Hong Kong's economic, financial, and socio-political linkages with the mainland implies its continued integration into China's national governance system, which will present greater institutional and regulatory challenges over time."

The protests over the past three/four months and consequent instability in the territory have raised recessionary fears. Following the Fed’s 25bps cut last month, the Hong Kong Monetary Authority cut its base rate to 2.25% (from 2.5%). As the currency is pegged to the greenback, this was a natural step, however, there is some uncertainty over whether a 25bps reduction is enough to support a somewhat fragile, yet still “wealthy” economy. 

Hong Kong is included in our investable universe with Net Foreign Assets around 300% of GDP. Unfortunately, there is not much value in the nations’ bonds currently, with the likes of Standard Chartered Bank Hong Kong 5.875% 2020s offering a yield and return of only 3.3%. Although the bond has more than enough credit cushion at ~4 notches, the risk adjusted expected return is not sufficient to warrant a position.

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