Economic forecasts are predicting gloomy skies in Hong Kong as rising rates are ready to descend upon the city, which could hamper the area’s local housing market as the monetary policy leans more towards a tightening that could put a stranglehold on financing options.
In Hong Kong, finance and real estate comprise a $340 billion economy–as rates rise, these sectors will be the most susceptible. Furthermore, market drawdowns in mainland China will also have a relational effect on the health of Hong Kong’s economy.
Until 1997, Hong Kong has been under British rule as a special administrative region of China. Since then, the territory is economically autonomous with its own currency, the Hong Kong dollar, which is pegged to the US dollar. With the U.S. Federal Reserve already greenlighting two interest rate hikes this year and possible two more by the end of 2018, interest rates in Hong Kong will follow that upward trajectory, which will increase borrowing costs in an area that already boasts high prices–in Hong Kong, the median house price has already risen for 27 consecutive months.
Related: Possible Carnage in the Bond Market
Furthermore, trade wars between the United States and China could also exacerbate an economic drawdown, which could add further pressure on Hong Kong’s housing market.
“We’ve already seen the downbeat stock market impacted by uncertainties, including the further interest rate increase and the US-China trade war,” said Douglas Woo Chun-kuen, chairman and managing director of Hong Kong property developer Wheelock and Co. “They will also add pressure onto the property market.”
Interest-Rate Hedging Strategies
Hong Kong investors seeking refuge from rising rates can look at fixed-income ETFs in the United States like the InvesProShares High Yield—Interest Rate Hdgd (BATS: HYHG), which incorporates short-term rate hedging strategies. HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates.
Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade. By targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
For more trends in fixed income, visit the Fixed Income Channel.