HSBC Life Hong Kong tactically shifted more investments toward private credit to take advantage of high short-term interest rates but slowed capital deployment into real estate, Chief Investment Officer William Chan said in an exclusive interview.
"Over the next (three) years, we look to deploy $1 billion each year into private credit," Mr. Chan said. "We started to invest in private credit in 2020 ... $1 billion is quite significant relative to our total capital deployment."
Its private credit investments are mostly through funds with large general partners "in order to achieve diversification," and the loans largely originate in the U.S., according to Mr. Chan.
However, he noted that it was not intentional for the team to be overweight U.S. private credit as opposed to local loans. "It's just the nature of the market," Mr. Chan said.
"The nature of the private credit market is that they are largely U.S. and Europe-centric," he said. "The private credit market in Asia is still quite young (and) still developing. So, in terms of share of the market, Asia is still relatively low."
HSBC Life Hong Kong also plans to deploy $1 billion to private equity each year for the next three years, but declined to comment on how much this compares to previous years.
"Private equity has delivered exceptionally strong investment return over the last few years, which may be difficult to sustain as the global economy slows and cost of borrowing climbs. However, for this asset class, it is important to keep steady capital deployment in order to achieve vintage diversification. In fact, history shows that new capital deployed in periods following financial market stress and recession tended to generate higher than average return," Mr. Chan said.
"In terms of sector focus, we favor sectors with higher long-term growth potential, like health care and technology. In terms of region, we seek diversification but are particularly keen on opportunities in Asia."
The life insurer does not publicly reveal its total assets under management, a spokeswoman said. However, in the first three quarters of 2022, nearly a quarter of new life insurance plans in Hong Kong were written by HSBC Life, according to the local Insurance Authority.
A large part of the portfolio is made up of long-dated corporate bonds for asset-liability matching, Mr. Chan said. And the proportion of those vs. growth assets (which HSBC Life classifies as listed equity, private equity, private credit, infrastructure and real estate) differs depending on the insurance product, with the fixed-income to growth asset ratio ranging from 80-20 to 40-60.
The push toward private credit came out of the lifer's tactical shift toward asset classes that benefit from the high short-term interest rate, Mr. Chan said.
"Over 90% of the private credit portfolio is floating rate in nature and they benefit from higher policy rates ... In fact, a lot of alternative credit investments are floating rate by nature, including, say, loan funds," he said.
"On the other hand, there are asset classes which are somewhat negatively affected by the high interest rate environment, including, for example, property, real estate. So, capital deployment into real estate has slowed down," he added.
The insurer's property portfolio is made up of real estate investment trusts, unlisted real estate funds and direct physical assets. To get global exposure to the asset class, the firm leans on REITs and unlisted funds, but prefers Hong Kong assets in its physical property portfolio, which reflects its U.S. and Hong Kong dollar liabilities, Mr. Chan said.
In the past year, the insurer slowed down deployment into physical property as "achievable yields become unattractive compared to corporate bonds, for example."
The firm uses single A-rated corporate bonds as a benchmark, and while corporate bond yields have risen in the past year, property rental income yields have not caught up yet, he said.
Investment-grade corporate bond yields-to-maturity have risen dramatically to 4.28% on Tuesday, compared to 2.63% a year prior, according to the S&P Hong Kong Investment Grade Corporate Bond index.
"Property yields are adjusting but they are not adjusting as fast relative to the pace of interest rate rises largely owing to the lack of transactions," Mr. Chan explained. "The market has become quiet, and consequently, there are less reference points for property valuers and consequently, the valuation adjustments — some of them have not come down."
Average monthly rental rates for the office leasing market fell to HK$54.80 per square foot in February, compared to HK$57.50 the year before, according to research by real estate company Jones Lang LaSalle IP Inc.
The retail and residential sectors have picked up in Hong Kong, but industrial buildings are still under pressure as total imports in the administrative region fell 30.2% year-on-year in January, and total exports fell 36.7%, according to the Hong Kong Census and Statistics department.
The insurer does not invest in residential property because it "does not fit out risk-reward assessment." Instead, it sticks to "more resilient sectors like data centers, logistics and cold storage. These are the properties that tend to have more stable long-term return," Mr. Chan said.
He added leases tend to be at least three years long, which cannot be achieved with residential property.
Despite the short-term pressures, however, he still believes that over the long term, real estate is "still a good asset class for insurance investment because they offer long-term cash flow from rental income … and also long-term capital appreciation."
Mr. Chan also believes the China's reopening of the borders will benefit other economies in Asia. "In Hong Kong in particular, a lot of sectors are quite exposed to China, through trade, import-export, capital flows etc. … And as the Hong Kong economy rebounds, the corporate sector will also benefit. We do expect a recovery in, for example, the retail sector, which was very depressed over the last few years."
"As the Chinese growth improves, we believe there are more opportunities for investors. In fact, we are discussing with our investment team to look into potentially accelerating our search for opportunity in China in (Greater Bay Area)-related private investments," he added.
