Bloomberg Intelligence reports

Hong Kong’s private wealth to rebound on higher rates, talent influx

Hong Kong’s private-wealth inflows are poised to accelerate as the city’s higher interest rates, easier cross-border market access, the government’s talent visa schemes and tax incentives for family offices to set up shop in the city attract wealthy investors.

Private wealth inflows could jump fourfold

 

Hong Kong’s net private-wealth inflows likely jumped more than fourfold in 2023 and may revert to near pre-pandemic levels in 2024, we calculate, fueled

by easier cross-border market access, higher interest rates in the city compared with the Mainland, and the government’s push to attract wealthy migrants and family offices. Our calculation assumes inflows will revert to 5.6% - 6.7% of opening assets under management. Private wealth AUM could jump to HK$10.8 trillion by 2025 even without investment gains and exceed HK$12.4 trillion if annual investment returns rise to 5% on average in 2023 - 25, we calculate.

The city gained net inflows of HK$121 billion in 2022, according to the securities regulator’s survey released in August, despite emigration during the pandemic, fears of capital flight and the stock-market slump.

Hong Kong, Mainland investors could drive inflows

 

 

Local Hong Kong investors’ AUM, which accounts for nearly half of the city’s private-wealth sector, could be supported by inflows from new Mainland Chinese migrating to the city. Most applications for Hong Kong’s talent-immigration programs and previous capital investment entrant scheme originate in Mainland China.

Mainland Chinese investors accounted for 16% of Hong Kong’s private wealth AUM — which has been steady over the past two years — supported by their desire to diversify investment overseas and reduce exposure to property. Hong Kong remains a preferred destination for Mainland wealth due to its proximity, cultural similarities, low tax rate, business-friendly regulations, global access and product diversity.

Wealth headcount surged despite geopolitics, macro challenges

 

Hong Kong’s private wealth management industry could continue to see strong hiring activity, in stark contrast with a shrinking investment-banking headcount amid a slump in initial public offerings. Private wealth headcount surged 23% to 10,365 in 2022, according to the SFC, despite a smaller total labor force amid strict Covid curbs. Competition for talent among Hong Kong’s private-wealth managers could intensify as large companies such as HSBC, Standard Chartered and Mainland Chinese firms vie for market share in Asia’s wealth hub and capitalize on recent disruption at UBS as it integrates Credit Suisse.

Standard Chartered planned to hire 300 - 500 staff in Hong Kong in 2023. Its headcount has ranged from 5,500 to 5,800 in recent years.

Large family offices might prefer Hong Kong’s tax incentives

 

 

Hong Kong’s tax incentives could attract ultra-high-net-worth individuals to set up single family offices in the city. Singapore has comparatively more stringent requirements on local business spending and the number of investment professionals required for larger-sized family offices to be eligible for tax concessions. Family-owned investment holding vehicles managed by single family offices in Hong Kong wit capital of more than HK$240 million are exempt from profit tax from the 2022 - 23 tax year. Chief Executive John Lee set a target in his 2022 policy address to have 200 large family offices established in the city by 2025.

The Hong Kong government launched a capital investment entrants scheme this year for those that invest at least HK$30 million.

Better returns fuel southbound sales surge

 

The cumulative value of southbound investment products sold to Mainland Chinese investors soared 188% sequentially to 16.2 billion yuan ($2.2 billion) in March, powered by recent enhancements to the program, investors diversification needs and better returns versus onshore products. 

The interest-rate differential between Hong Kong and Mainland China will remain, even if the federal funds rate begins to fall. More policy-rate cuts in China are on the horizon, according to a Bloomberg survey of economists in March. Rising expectations for a delay in the Fed’s next rate cut to either September or November, as implied by futures, due to persistent inflation could keep the rate differential wider for longer.

China’s interest rates cut while Fed’s delayed

 

 

A potential delay to the Fed’s interest rate cuts, as implied by futures, could keep yields of US dollar and Hong Kong dollar money-market funds and deposits higher for longer. Returns on money-market funds in China face pressure as the central bank mulls more rate cuts, even after several reductions since May last year. The Secured Overnight Financing Rate of 5.3% and overnight Hong Kong Interbank Offered Rate of 3.5% on April 23 is far higher than the seven-day annualized yield of 1.75% for Tianhong’s Yu’E Bao, China’s largest money-market fund. Hibor deviates from SOFR despite Hong Kong’s dollar peg, reflecting changes in the city’s aggregate balance and local liquidity.

The surge in southbound wealth sales since 2022 coincided with yuan weakness against the dollar, when short-term interest rates in the US began to exceed China’s. 

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China favors clean energy; Malaysia opts for Shariah

Our analysis shows that each market’s main ESG themes tend to be determined by its unique dynamics. China’s green commitments, including renewable energy and electric vehicles, have been appealing to investors, and this interest is reflected in the increase in launches of clean-energy ETFs in the past three years. Such ETFs represent more than 70% of the total AUM of China’s ESG ETFs. The ESG themes in China have started to broaden recently.

 

In Malaysia, Shariah-based ETFs continue to dominate with nearly $130 million in assets by the end of 2023, equivalent to 24% of the country’s total AUM in ETFs. Australia- and Taiwan-domiciled ESG ETFs mostly focus on ESG strategies, and these account for more than 80% and 70% of the ESG ETFs’ AUM of the respective markets.

 

 

Policy is today’s challenge, tomorrow’s opportunity

APAC ex-Japan is still catching up to the West in shaping regulations for ESG funds. While evolving policies may hamper fund launches in the short term, a sound policy environment can in the long run boost investors’ confidence in ESG ETFs, increasing their penetration. Political environments in the region appear supportive of introducing ESG fund rules. In particular, regulators are mandating disclosures and setting investment thresholds for local-domiciled ESG funds. Hong Kong’s Securities & Futures Commission recently enhanced ESG funds’ disclosure requirements to require periodic assessments and
reporting to explain how each fund is aligned with an ESG focus. South Kore has this year to start implement new ESG fund disclosure standards.

 

 

ESG, clean energy dominate among diverse products

The diversity in ESG ETFs in Asia-Pacific ex-Japan may create a range of growth sources for the asset class. Of about $35 billion in ETF assets, more than 80% is deployed in ESG and clean-energy strategies. Clean energy has always been a popular theme and has maintained a share of more than 30% of the region’s ETF assets since 2021, much higher than for Japan. ESG ETFs’ share of the total rose to 54% in 2023 from 35% in 2021, signaling that investors are not only focusing on green investment but also on broader ESG strategies. ETFs based on Shariah is a major theme in Southeast Asian nations, such as Malaysia, though they account for only a tiny fraction of the region’s AUM.

In contrast to the US and Europe, Asia-Pacific ex-Japan doesn’t have many ETFs focused on social responsibility and diversity.

 

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Spot crypto products may lead to more inflows

Indications from the launch of US spot Bitcoin ETFs three months ago are pointing to greater demand than what cryptocurrency exchange-traded-products (ETPs) can meet, with global crypto ETPs taking in $24 billion of inflows since inception. These ETPs, whether based on spot prices or futures, are listed on major exchanges globally and taking a larger slice of investors’ portfolios after chalking up $13 billion inflows this year. With new spot Bitcoin and Ether ETFs having arrived in Hong Kong, $1 billion in AUM could be added to the city’s market.

Bitcoin funds account for 4% of global Bitcoin supply, and with the recent halving, demand could increase as more funds are listed around the world. That in turn could affect supply and prices.

 

In-kind creation already used in Europe and Australia

Europe’s ETFs and ETPs are mostly in-kind creation/redemption, which can lower costs and promote certain trading efficiencies. Certain brokers prefer cash, like the banks as they can’t hold virtual assets. In Europe, 21Shares has 39 ETPs with $3.1 billion in AUM. In the US, the SEC only allows cash creation — cash in, ETF out — which could make Hong Kong a favorable destination for investors holding Bitcoin and Ether. In Australia, Global X’s 21Shares Bitcoin ETF (EBTC AU) and Ether ETF (EETH AU) are both spot and in-kind creation and redemption, which follows a similar set-up to Europe. Both ETFs have $71 million in AUM listed on CBOE. In Australia, we could see virtual asset ETFs being listed on the Australian Securities Exchange (ASX) in the coming months as well. Other regions in the Asia-Pacific could follow suit.

 

 

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