Ask our experts
The expert panel holds forth on vexing questions of investor interest:
Patrick Ho (head of equity research, APAC, UBS Wealth Management Research) is asked: What should investors make of the recent sell-off in the CNH currency? What does the move mean for yuan assets traded in Hong Kong?
The Chinese yuan has stayed around its post-revaluation highs against the US dollar in the onshore market amid the ongoing financial market volatility, signalling China's willingness for a gradual appreciation of CNY (yuan traded onshore in the mainland).
However, the market for CNH (offshore yuan traded in Hong Kong), which usually trades at a slight premium to the onshore CNY rate, has started to trade at a discount. We do not think this will be sustained, given that the CNY remained stable against the US dollar even during the 2008 financial crisis. We expect the CNH to revert and trade closer to the onshore CNY rate in the near term, as long as the People's Bank of China continues to keep the daily CNY rate steady against the US dollar, or guides the CNY stronger.
Therefore, investors can still use the CNH market to gain exposure to the CNY. The best approach is to create a diverse portfolio of Chinese yuan corporate bonds and stick to quality names, given the current sell-offs, liquidity squeeze and higher default risk for sectors such as Chinese property.
Mark Matthews (head of research for Asia, Julius Baer) is asked: Why are commercial banks printing Hong Kong's money?
Under British rule, Hong Kong had no central bank. That was not unusual; across Asia there were few central banks until after the second world war. In Hong Kong and other trading centres, business was done in silver-backed currencies such as Mexican dollars, bank notes from HSBC and Standard Chartered Bank, and British Trade Dollars.
Bank notes in Hong Kong are issued by three commercial banks (HSBC, Bank of China and Standard Chartered). Note-issuing banks are required to submit US dollars (at a rate of US$1 for HK$7.80) to the Hong Kong Monetary Authority (HKMA) in return for Certificates of Indebtedness.
The bank-issued notes are fully backed by US dollars held by the Exchange Fund. For notes and coins issued by the government through the HKMA, transactions between the HKMA and the bank responsible for storing and distributing the coins are settled against US dollars.
The currency board introduced in 1983, which pegs the Hong Kong dollar to the US dollar, means monetary policy sits not with the HKMA but with the US Federal Reserve. Hence the HKMA has no business printing money. But HK$10 notes are issued by the HKMA, and all 16 of the other currencies pegged to the US dollar (mostly in the Caribbean and the Middle East) are printed by their countries' central banks or monetary authorities.
The HKMA may think that Hong Kong people take comfort in the diversification provided by three international commercial banks. It is not the only relic of Hong Kong's colonial past.
James Barrett, quantitative analyst with RBS, was asked: What stocks do you like?
During a global recession, companies in defensive sectors that can still generate cash after revenues have been hit are likely to outperform their more cyclical peers. We recently ran a stress test to evaluate how industrial stocks would be affected by slower global GDP growth. Stocks were screened to determine which are best positioned to handle a 10 per cent decline in revenue. The goal was to identify stocks that will outperform or lag in the context of a global slowdown.
As expected, highly cyclical stocks were the most affected. Of the 50 stocks most affected, 16 were commodity plays and 12 were capital goods plays. Stocks in Malaysia, China and South Korea were the most severely affected.
The stocks that will outperform or lag in the context of a global slowdown are ChangYou.com in China and CapitaMall Trust in Singapore.
