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Will Hong Kong ETFs Suffer on Moody's Downgrade?

Sweta Jaiswal, FRM

Moody’s Investors Service recently downgraded Hong Kong’s rating as a long-term issuer of debt to Aa3 from Aa2. Notably, this rating giant lowered Hong Kong’s ratings for the first time after May 2017. However, it updated the outlook to stable from a negative.

Hong Kong’s economic growth has largely been affected by the frequent pro-democracy protests and clashes between the police and demonstrators since June 2019. The agitation had begun across the city post the government’s proposed extradition bill.  This standoff has been severely hurting the private consumption, tourism and fixed investment levels in Hong Kong. High unemployment level is also inducing disappointing household spending and sluggishness in economic growth. In fact, the unemployment rate rose to 3.3% for fourth-quarter 2019 from 2.8% in the months before June 2019.

In this regard, the rating agency notified that “the absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody’s had previously assessed”.

Notably, Fitch Ratings slashed Hong Kong’s rating in September to AA from AA+ with a negative outlook.

Looking Forward

The world’s major indices are taking a hit due to the latest coronavirus outbreak in China, which has claimed 26 lives so far and about 830 confirmed cases have been registered. In such a bleak scenario, if the situation further worsens then it can be another headwind to Hong Kong’s economic progress (read: ETF Strategies to Combat Coronavirus Outbreak)

Moreover, it is believed that the phase-one trade deal will help improve the trade scene around the globe but the relief will be temporary. China will have to grapple with 25% tariffs on $250 billion worth of Chinese industrial goods and components used by manufacturers in the United States. The tariff-related issues are expected to be dealt with during the phase two of the trade deal (read: Phase-One Trade Deal to Boost These ETF Areas).

ETFs That Might Lose

Against this bearish backdrop, let’s take a look at some Hong Kong ETFs that might suffer:

iShares MSCI Hong Kong ETF EWH

The fund provides exposure to large and mid-sized companies in Hong Kong and tracks the MSCI Hong Kong Index. With AUM of $2.10 billion, it holds a basket of 43 stocks, heavily focused on the top firm. The product charges 49 bps in annual fees. The fund trades in average daily volumes of 6.1 million shares. It has a Zacks ETF Rank #3 (Hold) with a Medium-risk outlook.

Franklin FTSE Hong Kong ETF FLHK

The fund provides targeted exposure to large- and mid-sized companies in Hong Kong and tracks the FTSE Hong Kong Capped Index. With AUM of $19.2 million, it holds a basket of 92 stocks, heavily focused on the top firm. The product charges 9 bps in annual fees. The fund trades in very low average daily volumes of 934 shares. It has a Zacks ETF Rank of 3.

SPDR Solactive Hong Kong ETF ZHOK

The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Solactive GBS Hong Kong Large & Mid Cap USD Index. With AUM of $8 million, it holds a basket of 51 stocks, heavily focused on the top firm. The product charges 14 bps in annual fees. The fund trades in very low average daily volumes of around 1,800 shares. This ETF is Zacks #3 Ranked.

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iShares MSCI Hong Kong ETF (EWH): ETF Research Reports
 
SPDR Solactive Hong Kong ETF (ZHOK): ETF Research Reports
 
Franklin FTSE Hong Kong ETF (FLHK): ETF Research Reports
 
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