$29T in Wealth Mgmt Eyes Low-Vol Haven Amid Market Volatility
As the calendar flipped to July, a resurgence in the banking wealth management sector has been observed, with an uptick in scale surpassing one trillion yuan. Yet, despite this rebound, the yield rates continue their downward trajectory that characterized the first half of the year.
Recent fluctuations in market sentiment have been propelled by expectations surrounding central bank operations, leading to heightened volatility in the bond market. Consequently, the yields on wealth management products are once again trending downwards. In light of this persistent turbulence, asset management firms are diligently refining their investment strategies, embracing a more diversified approach. Industry experts anticipate that the bond market will maintain its erratic movements in the latter half of the year, pushing firms to adopt "low-volatility wealth management" as a focal point to offer investors stability amidst the unpredictability.
This dynamic of yield volatility is particularly pronounced at the close of quarters, the end of June witnessing a reduction in scale by approximately 600 billion yuan, followed by a notable revival at the beginning of July. Various market institutions have estimated that in the first two weeks of July, the size of wealth management products surged beyond one trillion yuan, pushing the overall market scale past 29 trillion yuan, edging closer to the 30 trillion-mark. However, pressures from the intensified bond market volatility have consistently disrupted net value fluctuations and continued to drive down yields.
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In the first week of July, the yield curve for the bond market initially spiked before eventually retreating. During this period, the range of yields for wealth management products likewise saw a decline. A statistical analysis by Huaxi Securities indicated that pure bond category products experienced a drop in weekly yield, with short-term bond products decreasing by 0.03% in weekly net value, while intermediate and long-term bonds fell to a mere 0.02%. In the mixed product category, net values initially dipped before rebounding, with a flat yield of 0% recorded in the past week, showing a comparative decline of 0.06%.
A market participant relayed to reporters that in the second week of July, the bond market remained heavily influenced by speculations surrounding central bank debt sell-off announcements, leading to a prevalent bearish sentiment in trading. Conversely, allocation strategies appeared calm as institutions took the opportunity to secure profits while various entities exploited the market dips, with volatility continuing to exert its influence on the yields of wealth management and fund products.
Prior to the ongoing yield decline, performance benchmarks and downward pressure had already been somewhat disruptive to the wealth management market. Data from Puying Standard indicated the performance benchmark for newly issued wealth management products in June was recorded at 2.97%, down from 3.06% in May. During this timeframe, the overall market witnessed a substantial decrease in yields across different products, with open-ended fixed income wealth management products averaging a one-month annualized yield of 2.81%, reflecting a 0.44 percentage point drop and marking the first instance of falling below the 3.00% threshold in three months.
Furthermore, the annualized yield for managed wealth products and closed fixed income wealth management products averaged 1.87% and 3.71%, respectively, also showing declines of 0.09 and 0.14 percentage points.
Looking ahead to the latter half of the year, analysts express concerns regarding the potential ramifications of a series of central bank interventions, government bond issuances, and an "asset drought" on market dynamics. Wang Haibo, a fixed income analyst at CICC, noted that without visible drastic changes in fundamentals, the likelihood of yield increases remains low, while substantial declines appear equally constrained, suggesting a trend of ongoing market oscillation.
On the subject of expected yield performance for wealth management products, Chen Hao, a senior research analyst at Industrial Bank, highlighted that significant portions of these products invest in bank deposits. Consequently, with stricter regulatory measures curbing manual interest supplementation and banks reducing deposit rates, yields from wealth management products tied to deposits are anticipated to decline, which would inversely affect bank wealth management yields.
"The expected annualized return for wealth management products for the latter half of the year may drop to just above 2%," stated Liao Zhiming, a banking analyst at China Merchants Securities. He also emphasized the need to recalibrate return expectations due to the convergence of declining bond yields and prohibitions against manual deposit interest supplementation.
In response to the evolving landscape, firms are increasingly gravitating towards "low-volatility and steady" investment strategies. Observations from diverse wealth management companies indicate a palpable trend towards this stable investment focus.
Since the beginning of 2023, there has been a notable shift in wealth management products towards greater allocation in bond funds. Data from China Merchants Securities revealed that by the end of the first quarter, the asset scale of bank wealth management invested in public offerings had reached approximately 700 billion yuan, up from 600 billion yuan at the end of the previous year, marking an increase in percentage from 2.1% to 2.5%. Notably, bond funds have been allocated approximately 100 billion yuan more, while money market funds, alternative funds, and Qualified Domestic Institutional Investor (QDII) funds have also seen small upticks, contrasting with reductions in equity mutual funds.
Multiple wealth management professionals affirm that regulatory interventions to cease manual interest supplementation have resulted in reduced rates for traditional deposit assets, thus motivating banks to favor bond funds, particularly short to intermediate duration funds. Their low-risk and low-volatility characteristics promise stability in returns, ultimately strategizing to secure steady income for investors amid market fluctuations.
Puying Standard researcher Qu Ying noted that after a strategic reduction in allocations during the fourth quarter of 2023, banks have markedly resumed investing in public funds as of early 2023. This pivot signifies a resurgence of public funds as a pivotal component in bank wealth management strategies as they adapt to changing market conditions.
However, there have been reports of turbulence within bond funds themselves throughout July. Following a series of central bank measures, broad adjustments occurred in the initial week of July, with over half of bond fund products experiencing declines in net value.
Many wealth management companies are also experimenting with "fixed income +" investment strategies, aiming to ensure low volatility while still capturing attractive margins. For instance, amid significant price fluctuations in the convertible bond market, some analysts suggest that the current valuation presents a buying opportunity. In light of this, Zhongyou Wealth Management has introduced a "Fixed Income + Convertible Bond" product, promising a target annualized profit rate of 3.50%, thus representing a favorable low-volatility investment avenue.
Throughout the first half of the year, both international and domestic gold markets saw substantial growth, prompting numerous wealth management firms to launch "Fixed Income + Gold" products, often linking to gold ETFs, gold options, and physical gold. The general annualized yields for these products ranged from 4% to 5%, with some peaking beyond 8% at one point.
"In an era of declining risk-free yields, achieving a balance between returns and risk has become the cornerstone of competition among financial institutions and their wealth management products," emphasized Wang Hongying, President of the Chinese (Hong Kong) Institute of Financial Derivatives Research. With traditional fixed income products losing their allure and equity products becoming increasingly risky, the trend is shifting towards developing more composite and flexible investment solutions.
Industry insights reveal that market volatility, combined with the comprehensive transition of wealth management products to net value models, has led to a more direct reflection of underlying asset price fluctuations on product performance. This evolution has heightened investors' sensitivity to net value changes and potential risks. Wealth management products catering to the demand for stable investments have increasingly exhibited normalized patterns of net value fluctuations, necessitating a requisite prudence in crafting low-volatility investment strategies. A representative from a wealth management firm articulated that by implementing rigorous risk management practices and incorporating low-volatility asset allocations alongside cost-effective valuation methodologies, firms can effectively mitigate exposure to net value variability in a volatile market, ultimately meeting investors' appetite for stable yield.