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Bonds

Hong Kong’s strong wealth offsets slow population growth, says Stratton Street

The fixed income specialist says the key is to invest in faster growth and wealthy countries, but to avoid indebted countries with shrinking populations

PUBLISHED : Monday, 21 August, 2017, 6:10pm
UPDATED : Monday, 21 August, 2017, 6:11pm

Hong Kong is one of the wealthiest places in the world, providing attractive fundamentals similar to those in Switzerland, Qatar and other Middle Eastern countries for bond investments over the long term, according to London-based fixed income specialist, Stratton Street.

The city was also one of the world’s largest net creditors, benefitting from the fact that it had amassed substantial assets abroad, and implying that it could draw down on its overseas investments, Andy Seaman, partner and chief investment officer at Stratton Street said.

It is ranked second place in net foreign assets as a proportion of GDP out of 43 countries, according to Stratton Street, which screened countries based on their ability to repay debt. China is ranked 13th place.

“If you have amassed a lot of wealth over the years, then you can continue to expand production through investments,” Seaman said.

“That’s not the case if you are an indebted country that needs to offset a population that is shrinking.”

Hong Kong’s population has been growing at an average annual rate of around 0.7 per cent for the last 10 years, to 7.38 million in 2016, according to the census and statistics department.

If you have amassed a lot of wealth over the years, then you can continue to expand production through investments
Andy Seaman, Stratton Street

By 2050, 48 countries around the world will have smaller populations than they do today, which means fewer workers to support an increasingly large number of dependents and having a large impact on GDP.

Finances of those government would be strained, especially for those nations already burdened by high debt loads, Seaman said.

For China, the key was to invest in its economy in order to ensure that its growth doesn’t completely collapse as a consequence of the declining population caused by its one-child policy, Seaman said.

China’s economic growth will slow regardless of demographics, but redeploying its significant domestic savings and recycling its current account surplus into the Belt and Road initiative may generate higher economic returns.

Stratton Street’s Next Generation Global Bond Fund, which uses forecasts of population growth rates and projections of net foreign assets to measure the wealth of nations, has returned 6.96 per cent so far this year, and holds Chinese quasi-sovereign bonds that are dollar denominated.

It expects the yuan to appreciate over time given that China continues to run a current account surplus.

In contrast, the fund has no assets in the European Union because of stretched valuations and much poorer fundamentals – many European countries are heavily indebted with a significant shrinking population.

“You want to invest in the faster growth countries and the wealthy countries, while avoiding at all costs the indebted countries with shrinking populations,” Seaman said adding that he prefers Chinese quasi-sovereign bonds that are dollar denominated.

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