What's the Matter With Hong Kong Investors?

Kate Lin: Welcome to Morningstar. Morningstar has published a comprehensive report on what influences investors' financial preference and risk tolerance. This unique report compares investors across 14 markets. How different are investors in Asia from their global counterparts? Bryan Cheung, Associate Director for Manager Research at Morningstar is here to tell me.

Hi, Bryan. What investor behaviors are we seeing in Hong Kong and Singapore?

Bryan Cheung: Hi, Kate. Yeah. In fact, Hong Kong and Singapore share quite a few similarities overall. So, if you look at these metrics here, that shows each markets' willingness to take risk considering their overall equity and cash exposure, Hong Kong and Singapore are fairly comfortable with risk, which sit at the middle and the mid right of the chart. Although they are not as aggressive as U.S. investors who tend to have the highest level of equity exposure and the lowest cash and deposit exposure, but they are not as conservative as markets like Japan, where more than 50% of household assets are in cash, which is the highest among all the 14 markets we cover.

And investors in Hong Kong and Singapore, they have access to many financial products, and they can easily invest into stocks, FX and funds, et cetera. But they often don't go with an asset allocation approach. Meanwhile, they like to hold a decent amount of cash probably for general savings, emergency funding or just a sense of security, which could be cultural or psychological – for example, risk aversion. However, we got to say that no market and no investor is the same because of the different driving forces that can be very unique in each market. For example, personal beliefs like why do we associate money with greed or with opportunity and how well are retirement needs covered by the pension system and also what kind of financial advice do we receive? Therefore, there would be some nuance that would differ for Hong Kong and Singapore markets, but those would be more detailed in our study.

Lin: So, let's focus on Hong Kong and Singapore. Why are they less driven by asset allocation and what do they buy?

Cheung: Sure. So, instead of a portfolio approach that is typically underpinned by asset allocation, a product-driven approach is more prevalent in Hong Kong and Singapore. And one reason is that we see a gap of investor-focused financial advice in these markets. But why? So, the distribution of financial products is dominated by banking channels in these markets. They earn subscribe fees and also kickbacks from product providers. And their frontline sales, they earn commissions mainly based on sales volume. So, therefore, they are somewhat incentivized to recommend individual products that are most appealing in the current market environment, and they may also suggest clients to switch across different products rather than considering how all these products can work together for the clients' long-term financial objectives. But in contrast, in the U.S., advisors are more incentivized to grow a client's total portfolio over time with an asset allocation approach.

Then to your second question in terms of what Hong Kong and Singapore investors buy – so, I think, first of all, financial assets. Direct equities are the most popular type given that is the most accessible and also the cheapest to trade. And also, not to mention, you can be easily overwhelmed by stock market information 24/7. And then, mutual funds, on the other hand, are more secondary. But if you look at markets like U.S. and Australia, funds tend to be the most popular tool for savings serving as an efficient tool for investors to get diversified asset class exposure and also as building blocks for their investment portfolios. And then, for nonfinancial assets, it's quite obvious. Property is the biggest unsurprisingly.

Lin: So, with these, how do Hong Kong and Singapore investors, for example, retail investors need to change to improve their performance?

Cheung: Sure. That's a great question. I think, first and foremost, having a holistic portfolio approach can be a great starting point, as it can immediately mitigate some of the common biases that could lead to irrational decisions – for example, a panic sale during a market stress – and potentially derail your long-term financial success. And if you look at Hong Kong, there's a heavy home bias, which obviously has been very costly in the past one year. And by the way, a robust portfolio is not just about diversifying away your home bias, but it's also about striking a balance across different asset classes, sectors, style, and also individual holdings, given that it is appropriate for investors' risk and return expectations and to make sure that a choppy market won't keep your clients awake at night.

Another potential improvement to consider is to think about ESG in your investments. Because it's not just about managing the ESG risks like climate risk, but also to identify long-term growth opportunities like the energy transition trend. And therefore, understanding ESG can help make more informed investment decisions. However, at the same time, many companies and product providers want to take advantage of this trend. So, not everyone will be true to the ESG label per se. And so, there's the greenwashing risk that every investor needs to be extra careful of. And by the way, we are proud to say that Morningstar has been doing a lot of research on this front to help investors identify the good and bad apples. And last but not least, investors shouldn't be on their own to improve the investment outcome, because the industry plays a crucial role to educate and empower them to make better investment decisions – for example, giving them more comprehensive financial advice.

Lin: Right. Thank you for your insight. For Morningstar, I'm Kate Lin.