Industry Updates

Hong Kong's ETF market sees huge outflows

Felix Xu

Key points:

  • Hong Kong's ETF market has seen $3bn in redemptions this year

  • Almost all outflows are coming from China-focused funds

  • With low PE ratios, value traders see China as a value buy

Increasingly unstable global environment has weighed on Hong Kong ETF market with significant redemptions since last year, but local ETF managers believe the market will see a silver lining especially as equity ETFs appear to have recaptured investor interest with their attractively valued underlying assets.

According to Ray Chan, State Street's head of ETFs in Hong Kong, there was an outflow of around US$3 billion between January and August from ETFs listed in the city.

The sum of outflows was in line with that of the same period last year. The aggregated outflows were US$4.35 billion for the whole year of 2017.

Mr Chan attributes the prolonged outflows to a number of market factors such as the depreciation of emerging-market currencies and the global trade war.

The most liquid Hong Kong-listed ETFs are Hang Seng Index, H-share and A-share plain vanilla products that are heavily exposed to the Chinese economy. Hence the ongoing trade war between China and the US will "definitely" have an impact on the market, Mr Chan explains.

A-shares are stocks of Chinese companies that are traded in the onshore market. H-shares are stocks of Chinese companies listed in Hong Kong.

Almost all of the US$3 billion outflows this year were from large and liquid products that have underlying exposure to Hong Kong equities or onshore and offshore Mainland equities, Mr Chan points out.

With greater uncertainty around global trade tensions, some institutional investors have rebalanced their portfolios to switch their equities allocations from emerging markets to developed markets such as the US, which have relatively stable economic fundamentals.

"We've seen ETF redemptions taking places on the Hong Kong Exchange over the past few months as investors are readjusting their portfolios towards global developed market equities," he says.

However, Frederick Chu, head of ETFs at ChinaAMC (Hong Kong) Limited, says the direction of the flows in the city's ETF market was not a one-way traffic.

"We don't see an obvious trend that overseas investors are 'unwinding' their Mainland equity positions due to the changing market sentiment," Mr Chu adds. "Investors are rather 'elastic' on the impact of the US-China trade conflict at which they rebalance their ETF positions more frequently."

"For example, capital moved in and out of our recently launched ChinaAMC MSCI China A Inclusion Index ETF more often and more quickly in recent months," he says.

Active trading volume

According to Mr Chan, apart from the exodus of capital, transactions in the Hong Kong ETF market remain "very active".

For example, the Tracker Fund of Hong Kong, the largest ETF listed in the city, registered an average daily trading volume of $150 million in the first half of 2018. The fund is managed by State Street Global Advisors.

The volume dropped to $125 million in August, which Mr Chan ascribes to the "summer season effect" when many global fund managers are on vacation.

But he says it's still actively traded, and that flows coming from the Mandatory Provident Fund, Hong Kong's largest retirement scheme, remain consistent.

The Tracker Fund of Hong Kong is still commonly used by investors to track the performance of the city's stock market despite experiencing some outflows, he adds.

Overall, Mr Chan says the outlook for Hong Kong's ETF market will depend on how global fundamentals evolve after this summer.

One positive sign, he says, is that some investors have recently regained interest in local ETFs which are now trading at attractive valuations.

Mr Chu agrees that valuations may drive investor interest. He notes that China's benchmark CSI 300 Index has declined about 17% thus far this year and stocks are now trading at a price-to-earnings (PE) ratio of about 12 times 2018 earnings, near the lower end of its historical average.

"Some investors now identify A-shares assets as 'value trade' with the low PE", and may seek to raise their exposure to those shares via ETFs, he says.

Total market capitalisation of the city's ETF market was HK$327 billion (US$41.9 billion) at the end of July from HK$387 billion in January, according to the latest data from the Hong Kong Stock Exchange.

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