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INVESTMENT: High-Return Opportunities In a Low-Return Environment
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High-Return Opportunities

In a Low-Return Environment

By Anthony Lawry

BT 201609 070 02 Investment shutterstock 127871480Although geopolitical risk has caused many investors to stand on the sidelines with cash in hand, a substantial return cannot be made without accepting a degree of risk in the market given the current investing climate. The recent risk-accepting equities growth on a macro scale seems to have hit equilibrium as a desire for stability and liquidity increases and risk resilience appears to be decreasing. This appears to especially be the case for Chinese equities. All major East Asian indices were up for the month including Hong Kong's Hang Seng which garnered a noticeable +7.69% return while the Shanghai and Shenzen indices both ended up losing less than 1% respectively. This appears to suggest that Hang Seng offers a better opportunity for less risk-averse investors looking for returns in an equities environment characterized by its lack of palpable gains.

A few of the best performers in the Hang Seng over the past month include China Resources Land Limited (1109.HK) which was up 10.69% for the month, Sun Hung Kai Properties Limited (0016.HK) up 14.43% for the month, and AIA Group Limited (1299.HK) up 8% for the month. Other more hedged equities options include modestly performing Hang Seng mutual funds such as IShares MSCI Hong Kong ETF (NYSEARCA: EWH) up 7.62% for the month which includes a mix of small- , mid-, and large-caps with holdings in real-estate, energy and finance. Because this fund is one of the most traded, it is extremely liquid with a dividend yield of 2.51%.

BT 201609 070 01 Investment shutterstock 127871480For an investor who is bullish on the global economy looking for a long-term investment, this fund remains a safe bet for those looking beyond the horizon. However, those seeking a more interesting risk-oriented fund should look to the newly formed CSOP China CSI 300 A-H Dynamic Index ETF (NYSEARCA: HAHA). It is based on algorithms that regularly adjust as per equities that are most likely to become the highest performers in the Shenzen and Shanghai exchanges. The fund mainly includes financials, but also includes a diverse array of other sectors including industrials, utilities, consumer staples, health care, and information technology. The fund is up for the month by 6.78%.

Although equities remain a staple for basic investing in a medium to low returns environment, other more complex options may be considered for those feeling a bit more bearish on the markets. The Wall Street Journal recently reported that traders may soon have the option to trade a credit-default swap if the government approves the final operationalization of the derivative. This may create promising opportunities for portfolio diversification as well as an option for market hedging in an economic environment in which Chinese defaults are increasingly accepted as the slow and steady progress towards market liberalization marches forward.

The National Association of Financial Market Institutional Investors, a subsidized central bank that overlooks lending between banks, suggests that these "credit risk mitigation tools" will be in demand as the market progresses. However, an anonymous official from J.P. Morgan has claimed that if the International Swaps and Derivatives Agreement (ISDA) is put into place, a substantial investment (think hundreds of thousands of dollars) would need to be made in order for the investment to be profitable. Nonetheless, this is still an option that should be taken into consideration if fluctuations in the housing market become more noticeable.

BT 201609 070 03 Investment shutterstock 127871480Other alternatives are still numerous regardless of the economic climate. In spite of the losses traditional boons to the Chinese economy continue to be lower, for example companies with risk exposure to China such as Blackmores Limited (BKL.AX) whose stock took a hit with the end of July's were lower than expected PMI data. Furthermore, overall commodities prices including precious and industrial metals like copper and gold while agricultural commodities like corn were down 10% on a lack of Chinese demand according to Bloomberg Markets. This is in the face of increasing iron ore prices, but tends to trend along the price of oil and petroleum-based equities like CNOOC Ltd. (CEO) which was down 3.23% for the past month to date.

Overall, commodities trades should be treated like all other trades on a fundamental level: buy low, sell high. Now, commodities across the board have yet to recover from the slowdown which should suggest that a move into the sector whether it is with Chinese-based commodity equities, Chinese commodity-based mutual funds, or even commodities options is a prudent move. Yet, not all commodities are created equal. A number of analysts suggest that a move into oil is better now at around $40 a barrel over a year from now when it may be closer to $50 if market disruptions arise again or if global growth stabilizes as well making Chinese oil companies more appealing. Even so, the general investing climate appears to be a wait and watch scenario with investors holding their money on the sidelines to see how geopolitical and economic events play out over the next several months.


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