The Great Era of ETFs: Everyone Can Buy Global Assets with One Click | Chasing the Wind EP5.with Wang Yi

Global stock indices, U.S. Treasury bonds, gold, Bitcoin, various leveraged inverse tools, even Bridgewater's All Weather Fund and OpenAI equity—these global asset allocations that were once only accessible to large institutions can now be achieved by everyone.

The secret is: ETF.

On Wall Street, ETFs are hailed as the most important financial innovation since the ATM.

So:

What is the biggest motivation for investors regarding ETFs?

Why are more and more well-known fund companies eager to enter the ETF space?

What does the future of ETFs look like?

What will be the next wave of financial innovation?

How to allocate China overseas?

How will U.S. stocks perform next year? Is the U.S. economy "braking"?

With these questions in mind, Gu Chengqi, president of Wall Street Insights, Zhu Chen, founder of Zhicheng, and Wang Yi, investment director of the quantitative investment department at Southern Eastern Asset Management Company, engaged in an in-depth dialogue.

Wang Yi is mainly responsible for the investment of the company's ETF products, as well as active and fixed income products. The company has about 50 ETF products listed for trading in Hong Kong and Singapore, such as the Hang Seng Tech ETF, Hong Kong leveraged inverse ETFs, which account for about 99% of the market share. It also has the first Bitcoin futures and Ethereum futures ETFs among the virtual currency-related ETFs allowed in Hong Kong.

The company covers a range of product categories from stocks, fixed income, commodities to money markets. The investment scope includes more than a dozen or twenty countries such as China, the United States, Japan, and Southeast Asia.

The main points of the dialogue are as follows:

1. With the emergence of innovative products like leveraged inverse ETFs, different categories such as futures and OTC swaps are also included, allowing for broader involvement in other asset classes. Previously, people might have thought of Hong Kong as a turbo market, but since we launched leveraged inverse ETFs, the turbo market has decreased by more than 50%.

For investors, the biggest motivation for investing in leveraged ETFs is not the low fees, but actually the transparency. Turbo products, whether index turbo, individual stock turbo, or a game by an issuer, may appear to be tradable items in the market, but the only counterpart is actually the issuer. This has been criticized by investors for a long time due to some lack of transparency, leading to a poor investor experience. Naturally, there are better leveraged products available for easier trading.

The rules of leveraged ETFs are very transparent, and investors can at least understand them. In contrast, the transparency in the turbo market is not as high.

1. Various assets are being transformed into ETFs, starting from possibly bond assets and commodity assets. Initially, people might not understand why an illiquid asset could become an underlying asset, worrying about potential purchase issues, but now not only bonds but also private equity markets can be packaged into ETFs.

ETFs have now become a framework, or rather, they are no longer strictly a product category.

1. It was previously difficult for everyone to understand why an actively managed fund would become an ETF. However, we are now seeing more and more, not just ARK, but many well-known funds starting to say they want to enter the ETF space, including Bridgewater stating that they will turn their most famous All Weather into an ETF for ordinary investors. The success of ARK is a case where, after accumulating several years of very good performance, it can suddenly explode in KOLs, social media, etc., and be monetized. This appeal is very significant for many actively managed funds because, although many actively managed funds are very large or well-known, attracting growth in scale is still limited by channels. ETFs provide a very convenient way to reach the market, and some institutions may even buy directly through ETFs.

Many insurance companies only trade in the secondary market, without subscribing or going through the primary market. Originally, if an insurance company wanted to invest in All Weather, it needed to look at similar types, etc., and make decisions on asset allocation, whether it belonged to stock allocation or major asset allocation, and then buy in, and sell later. From the perspective of decision-making or channels, it offers significantly more convenience than the previous model.

1. ETFs enable global asset allocation; a person only needs a stock account to truly achieve global asset allocation from home, even full asset and full tool allocation. This was previously only possible for large institutions.

2. The market has already shown that ETFs are the most important wave of innovation in this round of finance. Looking ahead, many people mention a so-called concept of tokenization.

Tokenization is allowed in Hong Kong, and the Securities and Futures Commission has corresponding projects, such as Project Orbis-Intraday Assembly, which is currently in the sandbox phase.

Why is Hong Kong doing this? In fact, we also see innovation in the financial sector, which is partly within the financial sector itself, but also involves cross-border innovation. If we understand these on-chain innovations as financial innovations, they are indeed eroding the traditional financial business chain at different levels, and RWA or tokenization is a manifestation of this, representing a way for products to land.

We now see that BlackRock also has the world's largest token for U.S. Treasury bonds; although the scale is not large, it has already started investing in companies that are doing tokenization, tech companies, and many well-known companies in the U.S., such as Franklin Templeton, are also involved, so it is building the next stage.

If tokens become the next leader or target of financial innovation, when people talk about tokens, there is actually something that already exists on a large scale, such as USDT, which is considered the most successful case of tokenization However, in the field of tokenization, not everything can be tokenized and sold just because it has become a token, nor will there necessarily be trading. A long time ago, someone tokenized Tesla and Nvidia, but there was little trading and demand.

In fact, tokens allow certain traditional financial assets to face a brand new group of investors, which may have some overlap, but probably not much.

1. From our roadshow, we found that Saudi Arabia's understanding of China is far greater than China's understanding of Saudi Arabia. They even know a series of details about real estate, the economy, etc., and they tend to look at things from a longer perspective.

Moreover, they are also undergoing reforms, upgrading industries, and introducing some industries locally. Therefore, they do not have too many biases against China; their greater demand is whether there are real returns and whether they can make money.

Europe has generally been fine and does not have many biases against investing in China. There is a gradual trend in the Asian region to abandon the pursuit of Alpha.

Many foreign institutions that previously set up teams in Hong Kong or even had teams domestically, including some large sovereign funds, may no longer need to do so. If they really want to make allocations, they might just buy indices through ETFs to achieve exposure to China.

1. From various dimensions, there are signs of a slowdown in the U.S. economy, whether from the revenue growth of the Magnificent Seven or future bottlenecks. There is currently a certain shift, from chip bottlenecks to power bottlenecks, etc. Bottlenecks are always a major source of manufacturing price increases.

The current growth is actually okay; the only troublesome thing might be that Trump is very opposed to the chip bill. The core capex in the U.S. over the past two to three years has all come from this area, with very strong subsidies. This story is quite similar to many things that happened in China; we are investing in infrastructure while others are subsidizing chips. Overall, the capex generated by the Chip Act has gradually declined recently.

From another perspective, other industries are indeed not doing well. The reason we have been optimistic about tech or Nasdaq over the past two years is that it is not afraid of a high-interest environment. All mid and small-cap stocks are victims of a high-interest environment, so under such high-interest conditions, although it has decreased a bit, there are still concerns about a second wave of inflation in the future.

1. It is not just the U.S. Treasury that is under pressure; in fact, all sovereign countries globally are facing fiscal pressure, which reflects whether there are alternatives. Assets like gold and crypto may really serve as a substitute for sovereign credit. The popularity of crypto has instead driven demand for the dollar.

Sometimes it feels that its development, along with the dollar zone and stablecoins, is inseparable; it has even begun to be considered as a strategic reserve, which is indeed miraculous. In just over a decade, it has come close to touching the balance sheets of the Treasury and central banks The following is the full transcript of the dialogue:

Part One

Beyond Active Funds, Transparency Harvesting Investors... ETFs are one of the most successful trends in the current era of financial transformation

Gu Chengqi:

In fact, ETFs have not been in the sight of Chinese investors for a long time. It hasn't been particularly long since the first ETF appeared in China, but in the United States, it has gone through a very complete development stage, starting from index funds in the 1970s, to the subsequent boom of ETFs, and now it can be said that ETFs are the mainstream of the market, even dominating it.

Wang Yi:

In several markets, including the Chinese market and the U.S. market, the investment scale of passive ETF products has surpassed that of active funds.

Gu Chengqi:

What kind of magic do you think allows such a product to eventually rise above many markets, surpassing those very familiar active funds, and instead becoming the market leader?

Wang Yi:

There are multiple aspects. A well-known case is Buffett's bet on the S&P's returns over many years. If it could be beaten, what would happen... The final outcome is quite clear. Because active products have gradually been weakened by different thematic investments or product strategies over a long period of time. The main reason is that there were still quite a few opportunities for active investment to seek Alpha, such as mismatches in industries, mismatches in individual stocks, or momentum factors, etc.

However, the subsequent development has led to an increase in thematic or industry-related products, making it increasingly difficult for these actively managed companies to outperform the index. Index investing, whether in the form of ETFs or not, to some extent, still represents a transparency and rule-based issue. One transformation of index investing is the formulation of indices. For example, traditional indices like the Nikkei and Dow Jones are actually older indices. Their index compilation rules are quite unreasonable, such as equal weighting, non-market capitalization, or price determining their weight.

The core idea is that many indices tend to construct indices based on the concept of portfolio allocation, such as the S&P 500, and later the Nikkei, which mainly has its physical substitute in the TOPIX (Tokyo Stock Price Index). Many indices have gradually moved towards using market capitalization as weight, which makes issuance easier. People tend to view it as an investment portfolio.

With such an investment portfolio, its rebalancing or performance actually becomes a market benchmark. On one hand, once it becomes a market benchmark, the surrounding ecosystem also develops, such as its futures, options, or structured products in the OTC market, or ETFs. In fact, it is no longer just a product traded on the surface; behind it can imply different operations, trading strategies, and arbitrage opportunities, allowing more people to participate in investing.

So active investment is relatively pure, in that "I want to outperform the market." However, outperforming the market is becoming increasingly difficult; passive investment does not necessarily mean that many people participate in index investing just for index returns, as they certainly participate for different purposes. For example, domestic Xueqiu investments, or some so-called Fixed Coupon Notes and similar structured products, many are based on ETFs as the underlying asset. Whether it's knock-in or knock-out, it seems that many people are buying ETFs, but in reality, it's because the structured products have triggered knock-in or knock-out, leading to an increase in ETF product shares. This has happened a lot in Hong Kong and the United States, and it is also a major channel for ETF inflows or share increases.

Gu Chengqi:

I found an interesting story when researching the origins of ETFs: Vanguard founder John Bogle created the first index fund, which is the S&P 500 index fund, but he was actually very opposed to ETFs at first. He had a very stubborn viewpoint; the initial reason he created index funds was that he believed the best way for most investors to buy stocks was to hold them long-term and invest in broad-based index funds. He even suggested that the secondary market should be abolished, believing that the secondary market distorts things for most investors or even misleads them into making more trades.

However, even in the entire passive investment landscape, the proportion of ETFs has been increasing, surpassing traditional over-the-counter index funds. From a development perspective, Vanguard is very strong and is now a leader in ETFs, alongside BlackRock as the two giants. What do you think about this issue?

Wang Yi:

My perspective on this issue might be slightly different. Imagine how you would buy a public fund. If we talk about purchasing, the channels are very limited; it is actually a restricted channel, and in many markets, it is a monopolized channel. Most countries are quite similar in this regard.

Public funds are mainly concentrated in large banks and distribution channels. For example, in Hong Kong, HSBC controls 60%-70% of the sales share of public funds. In such a situation, if a fund company wants to grow, it can only bind itself to the strongest sales channels.

But ETFs break the traditional channel monopoly because as long as you have a stock account, you can purchase the desired index fund or ETF product in the secondary market.

For instance, if HSBC does not list a certain public fund, but investors want to buy that public fund, on one hand, investors gain considerable freedom. On the other hand, from the perspective of the product issuer, the product is aimed at everyone who has a securities account. While 60% of Hong Kong citizens may have HSBC accounts, 100% of people definitely have accounts with the Hong Kong Stock Exchange.

From this perspective, it actually breaks some traditional channel monopolies, making it easier for products to reach interested investors, not overly constrained by the traditional strong distribution channels.

Gu Chengqi:

So what you mean is: from the perspective of fund companies, they also have a strong motivation to expand the ETF business?

Wang Yi:

For institutions, the fees for ETFs are very low. Looking at the entire history, everyone initially laughed at Bogle, thinking that doing this would not make money and was meaningless, but now it seems to be a huge market From the perspective of current fund companies or asset management companies, what do you think ETFs mean to them?

Wang Yi:

It is clear that everyone has already accepted ETFs; it can be said that it is one of the most successful trends in the financial transformation of this era. I don't want to describe ETFs as a product category; it has become something of a framework category.

Within the ETF framework, many financial innovations actually revolve around this framework. It does not necessarily only represent passive indices; it may represent the entire so-called ETF ecosystem behind it, from market makers and PDs to issuers, exchanges, and regulatory bodies, etc. Its success is closely related to every link in this chain.

It is impossible to say that issuing a very good brilliant idea, having a particularly good ETF on the market, but no one trades it; thus, its scale or liquidity would also be poor. Conversely, if regulations do not allow various innovations, then one can only buy an index; in fact, its capacity is just index substitution, and index funds become ETF index funds.

For other innovations, the significance may not be particularly great, so various issuers or asset management companies are still investing a lot in ETFs, especially since our company's first star product in Hong Kong is the A50. At that time, when QFII was still quite valuable, we seemed to own an amount equivalent to a company, equivalent to owning the entire UK's QFII quota, making us the largest company in the world holding QFII quotas. The license number is 0001, which is equivalent to being the first institution to obtain QFII qualification.

Because ETFs were actually well-known in Hong Kong early on, such as the Tracker Fund of Hong Kong (盈富基金) 2800. For a long time afterward, there weren't many emerging or particularly successful ETFs born on the Hong Kong Stock Exchange. Later, BlackRock issued the A50, and we also issued the A50, followed by the Hang Seng Tech and Hang Seng China Enterprises, etc. Gradually, the market's acceptance of ETFs has increased.

With the emergence of innovative products like leveraged inverse, different categories such as futures, OTC swaps, and other derivatives have also been included, allowing it to broadly involve other asset categories. Previously, people might have thought of Hong Kong as a turbo market.

Since we issued leveraged inverse products, the number of turbos has decreased by more than fifty percent.

Gu Chengqi:

Do you think the biggest motivation for investors is because of its low fees?

Wang Yi:

Actually, it is transparency. It is still a game for issuers, whether it is index turbos or individual stock turbos, because it looks like something that can be traded in the market, but the only counterpart is actually the issuer. The issuer decides what to report, such as what the implied volatility is, which has been heavily criticized by investors for a long time in the past, such as being too wide or having poor pricing, etc. There are some less transparent aspects.

On the contrary, the rules for leveraged ETFs are very transparent, stating "today's daily return is two times, daily rebalancing," and for investors, "if it is not enough to be two times, you can sue them," or you can complain; at least it is understandable But if we say that Turbo should rise by 5%, 6%, or 6.5% today, it may actually depend on the family, or the lack of transparency in the market leads to a poor investor experience, then naturally there are better leveraged products available for trading.

Gu Chengqi:

You mentioned the story happening in the Hong Kong market, where initially there might have been only one or two ETFs, but now they have become a very important financial product. In fact, there is a similar pattern in the U.S. market, especially with the two largest companies, Vanguard and Blackrock. How did you feel about the rise of these two companies and the impact of ETFs on the market when you were on the front line in overseas markets?

Wang Yi:

At that time, I was in the UK working as an investment consultant for pension and insurance companies. In the UK, having an investment consultant is a legal requirement; every pension must designate an investment consultant to approve the annual investment plan, and the investment consultant must sign it, which is a legal requirement in the UK. In the U.S., it is not a legal requirement, but the market share of investment consultants is also very large, and many pension decisions are made through them.

We would come into contact with many fund companies because we represented pensions to do RFPs. For example, if a pension wanted to invest in a certain market, I would tell the fund companies in the market: "I want to invite bids; you can send your proposals here, and there is this much money..."

Interestingly, when we first did manager selection, the fund managers that came were traditionally from fixed income, and we would see PLCs, even large insurance companies like Prudential, M&G, and General competing for these bids.

Later, from an asset allocation perspective, many were modeled against benchmark indices, so in the eyes of many institutions, there would initially be a definition, for example, in the global stock market, the first judgment is whether it belongs to developed markets or emerging markets.

If it is a developed market, it is believed that it is difficult to achieve Alpha in this market, so there is a tendency to invest in indices to reduce fees when allocating developed markets; if it is an emerging market, there is a tendency to allocate to active funds. Therefore, you would see many EMD and EM Equity funds, which originally had a very large active scale because everyone believed they could beat the market due to various reasons and were willing to do so during allocation.

However, the fund market is still small during allocation. So when allocating DM, there would be a tendency to choose index funds because when creating a simulated portfolio, it is based on indices, "Well, help me find an S&P 500; I want to invest in the S&P 500," and generally, it stops there before looking for a manager.

I remember particularly clearly once when a certain bank in the UK had a very large pension scale and wanted to make asset allocation adjustments, such as shifting from stocks to bonds, and at that time, they were dealing with a scale of around £6 billion, and globally renowned asset management companies would come to pitch for this mandate When I was working, we would send out proposals to these large fund houses. But that time, we suddenly received a response from Vanguard, which we knew was a major index fund and ETF provider. We realized that ETF houses were starting to actively seek these mandates.

Gu Chengqi:

At least their participation in the institutional market wasn't that high, possibly due to salesforce reasons, perhaps coverage wasn't enough, or they were originally focused on the secondary market, etc. But they are gradually transitioning to or expanding into the institutional market; that was my understanding at the time.

What shocked me the most was actually their pricing. I found that all the ETF houses were quoting very low prices, even lower than the ETFs trading normally in the market, somewhat like a dimensionality reduction attack: "I want to do indexes, US stocks 7 basis points, US Treasuries 5 basis points..."

What impressed me deeply was that I noticed ETFs were starting to participate in the institutional market, and it was somewhat like a crushing style, beginning to aggressively overpower competitors, at least in terms of fees. Of course, at that time, there might still be gaps in the bidding documents, but at least the core was cheap, with a large product hanging above.

Another thing that left a deep impression on me was when BlackRock acquired BGI. I heard that they replaced most of BGI's middle and senior management because they believed this business was a flow business that required more systematic construction.

So later, when I saw them independently developing a series of technologies like Aladdin, our company was also doing technological iterations; we hadn't used Bloomberg for about four or five years. From an investment perspective, large ETF houses still need to invest in independent research and development, middle and back office, IT, and then connect with market makers and different market participants, which is very important.

BlackRock pursues innovation, Vanguard pursues philosophy; ETFs ultimately carry risks

Gu Chengqi:

You mentioned a particularly interesting development path, especially when comparing these two companies, Vanguard and BlackRock. Vanguard actually started with the very first index fund, and its ownership structure distributes everything to fund investors, believing that in this way, fees can be minimized without sales costs... Is this structure now a unique one?

BlackRock might be seen as taking a different path, inherently designed to serve institutional allocations, including Aladdin, and considering all the needs of asset management institutions on a large system platform.

We can see the differences between these two companies. BlackRock has a very extensive product line, with hundreds of ETFs, including the latest Bitcoin ETF, and it is also the leader. Vanguard, on the other hand, follows a different path; it doesn't have as many products, but each of its broad-based products is very large. Previous statistics showed that half of its assets were concentrated in three funds... What do you think of these two paths? Wang Yi:

From a personal perspective, I prefer BlackRock because it has always been at the forefront of both technology and financial innovation. When they were developing the Aladdin system, we weren't very optimistic or particularly understood such a huge investment. Even when Larry Fink said it would account for more than half of BlackRock's future revenue, it was still in the development stage, and he mentioned that it would become a Fintech company.

When I was in the UK working on pensions, he also recommended the Aladdin system to many institutions, which has different modules.

The 2008 financial crisis actually added a lot of personnel to BlackRock because they recruited many people from investment banks for OTC system trading, and their understanding of many technical aspects, such as OTC pricing, conducting technical stress tests, calculating PV, OI, and a series of other things, became a market standard because there was a system to implement these things.

Many things on the market might just be fixed values, but adjusting these things can be a bit tedious. It actually follows an innovative path, while Vanguard may follow a philosophical path, aiming more to instill ideas into the market or to practice "I want to implement the philosophy, and everyone should participate in this matter, so that everyone can benefit." This philosophy is not problematic, but innovation is not just in the financial market; it is core in all fields. It's either iterating on others or being iterated out by others.

At least from BlackRock's current development perspective, its industry position is still unquestionable, having become the largest globally.

Gu Chengqi:

BlackRock is actually continuously innovating, and recently it has entered the private credit market through acquisitions. In fact, ETFs are no longer just about turning a stock index into an ETF; now it is not just a product, but actually a framework.

Various assets are becoming ETFs, from the earliest bond assets to commodity assets. At first, people might not understand why an illiquid asset can become an underlying asset, and whether there would be issues with purchasing it.

But now, not only bonds, but the private market can also be packaged into ETFs; what kind of risks might be behind it?

Wang Yi:

The risk of bond ETFs seems to have been discussed for 10 years. From the very beginning of making bond ETFs, everyone would say that the underlying liquidity of bonds is not particularly good. If such a large scale encounters redemptions or major risk events, it would be impossible to sell.

But this is also what makes the secondary market interesting; there is always a price. For example, when we were dealing with RNBS, during the rebound from the 2008 crisis, RNBS had no quotes because there were simply no quotes. In such a large market, with daily transaction volumes of 200μ, 500μ, it was impossible to find buyers because everyone was selling. But in the ETF market, it sells shares on the stock market, and it’s just a matter of discounting; if no one buys at 70% off, then it goes to 50%, and if no one buys, it goes to 30%. It can always find a bottom This is actually quite difficult to achieve in the OTC market, because bonds, in the traditional sense, are an OTC market where there may only be 20 participants representing potentially hundreds of investors, but not the entire market.

It's similar to how many people buy TLT now; the liquidity of 20-year U.S. Treasuries is clearly not as good as that of TLT.

There may be misconceptions about ETFs; not all inflows and outflows of ETFs must be in cash mode. A bundle of goods can go in, and a bundle of goods can come out. Sometimes, people exaggerate the impact of ETF inflows and outflows on the actual cash market because many buyers or sellers do not necessarily need to liquidate at that moment.

Of course, this cannot be done across markets, and there are also some registration issues, etc. For example, in the Hong Kong stock market, physical subscriptions and redemptions can be done freely, like the Tracker Fund of Hong Kong (2800), which allows physical subscriptions. 99.9% of its annual subscriptions are physical subscriptions. However, there are a series of issues behind this, such as the Hong Kong transaction tax, etc., while ETF trading has no tax, leading to some tax avoidance operations.

But actually, looking from other markets, it has also facilitated investors, "You can take half of the stocks, and you help me with the remaining half," thus saving on transaction costs. So there are many flexible arrangements, different paths, and varying impacts on the market.

Therefore, many illiquid assets turning into ETFs, I personally believe, still carry risks because all ETFs ultimately trade the underlying assets, and the number of participants in the underlying assets determines the underlying liquidity of the ETF.

The underlying liquidity for ETFs is "needed, but not a must," because trading can occur at the underlying level, but it can also be done without it; shares can be sold or transferred at the original price as long as someone is willing to accept it.

Gu Chengqi:

We now see people like VC and Cathie Wood investing in OpenAI, then packaging it as VC and further ETF-ifying it. We see a lot of innovation in the U.S. market; will this be a trend in the Hong Kong market or in our future? For example, many investors cannot buy 20-year U.S. Treasuries or invest in OpenAI. Do you think more investors will increasingly use ETFs to achieve this in the future?

Wang Yi:

It has already progressed very quickly, even in the domestic market. The first trillion for ETFs took about a decade, the second trillion took about four to five years, and now we are at over 3 trillion; the third trillion seems to have taken just a few months. A clear trend is that people's acceptance of index products or index ETFs is increasing.

However, there are not as many varieties to choose from compared to overseas markets, and of course, not all overseas markets are as open as the U.S. For example, Hong Kong does not have double-leveraged individual stocks, leveraged inverse ETFs, CTA ETFs, structured product ETFs, etc. Recently, Hong Kong has introduced Covered Call, which was only issued this year This is also a major trend, as leveraged inverse products only emerged in the past decade, and the U.S. market has only seen a rise in these products in recent years. When we were developing leveraged inverse products in Hong Kong, we started from scratch and gradually became a supplement to the market. It cannot be said to be an absolute mainstream, but it is definitely a tool that retail investors can easily use to leverage or engage in speculation and trading.

Therefore, in the U.S., the regulatory environment is quite important; at least it is based on principle-based regulation, meaning that as long as the products, stocks, etc., comply with the guidelines, they are approved without reason for rebuttal. Moreover, from the perspective of U.S. regulation, the depth and breadth of the institutions involved are also quite extensive.

We also found that hedge fund ETFs use a single-channel model, which may involve some detailed aspects. ETFs have a primary market and a secondary market; the primary market has PDs (Participating Dealers) for subscription, but PDs may not necessarily be the ones trading directly in the secondary market. Many market makers acquire through PDs, and market makers are the ones trading directly in the secondary market.

The single PD model results in only one or a series of market makers. PDs know their actual holdings, so only one party knows what they are doing, and then these market makers are informed. This ensures that information is disclosed, but not to everyone, as only one PD is listed. Avoiding this from such a direction is also a thought process, but achieving this requires high technical standards.

If the ETF is passively tracking an index, there is no problem; it only adjusts the holdings every three months; actively managed funds like Ark may carry the risk of losing money.

In fact, many subsequent transmissions of information, as well as the reflection of facts, calculation of fund net values, adjustments of PCF, etc., require a high standard for the entire ETF system, which not every market has such a complete structure and infrastructure.

Market Makers Have Certain "Moats"

Gu Chengqi:

You mentioned two interesting questions. One, I think, is something that Chinese investors rarely come into contact with, which is the so-called market makers. I found that this industry has very large giants, such as Jane Street, whose income exceeds that of many major Wall Street firms' investment income, and they earn more than BlackRock does on ETFs. Why do you think market makers have such strong earning capabilities?

Wang Yi:

Because all market makers are not subject to regulatory agencies; strictly speaking, they can be considered hedge funds that specialize in arbitrage trading, cross-market trading, and providing liquidity, etc. Their earning capabilities are specifically reflected in: pricing and the construction of infrastructure.

For example, we have surpassed BlackRock in ETF trading in the Hong Kong market; our asset management scale, excluding the old market funds in Hong Kong, is actually the largest. All fund managers spend at least one-third to more than half of their time communicating with market makers.

Gu Chengqi:

A lot. For example, if A-shares surge and subscriptions are needed, can we do after-hours trading, TWAP, or MOC? Can we trade during specific periods or certain transactions, which funds can open, and which funds cannot? If we subscribe today or tomorrow, can we do a series of communication issues? Because for them, the greatest uncertainty in quantitative trading or market-making quantitative trading comes from the subscription or redemption transactions For example, both the CSI 300 have ETFs, and when there is a premium, it needs to be sold. However, going short on this ETF requires covering the exposure, which may be done through an OTC derivative or other channels, as they will compare prices through multiple channels to ensure that the friction costs are relatively low when making markets, and these are basically written into the code.

When I accumulate my position, having a premium position is one thing, and closing the position is another matter.

Gu Chengqi:

So it involves whether it's low-frequency or high-frequency. If there is a 1% premium in the market, everyone will act, but if the premium is 0.1%, not everyone will necessarily act. If you can only earn one tick, does everyone dare to go for that one tick? This poses a significant problem.

Because for market makers, all risks and uncertainties, from our perspective as issuers, such as trading and PCF, need to be communicated. Therefore, one important reason we can do well in Hong Kong is that our communication with market makers is very thorough.

Gu Chengqi:

In this system, market makers actually play a very important role.

Wang Yi:

Of course, without the existence of market makers, one can imagine that today the trading volume of buying ETFs is huge, but if no one is making a market, there would be no inflow.

Gu Chengqi:

From this logic, assets with poorer underlying liquidity pose even greater challenges for market makers.

Wang Yi:

In fact, there are many types of market makers, such as Jane Street, Flow Traders, etc., but not every firm engages in every asset class, country, or market; they have their own specialties.

If a market maker wants to enter a specific market, the initial investment is not small; it involves infrastructure, setting up these things, and connecting with exchanges, which requires a certain moat.

ETFs have become a framework, breaking channel restrictions to facilitate market access

Gu Chengqi:

Actually, it was difficult for everyone to understand why an active fund would turn into an ETF. But now we see more and more, not just ARK, but many well-known funds are starting to say they want to enter ETFs, including Bridgewater saying they will turn the most famous All Weather into an ETF for ordinary investors. Why is there such a trend?

Wang Yi:

This is the issue we discussed early on, that ETFs have now become a framework, or they are no longer strictly a product category. For example, All Weather always has a relative concept; the original reluctance to sell to everyone was because they felt selling to everyone wouldn't earn as much as dealing with a sovereign fund.

If All Weather performs well today, or has performed well over the past year, it may take another 3-6 months of pitching for these sovereign funds to invest. The success case of ARK is that after accumulating several years of very good performance, it suddenly exploded on KOLs, social media, etc., and could be monetized. **

This attraction is very significant for many active funds, because although many active funds are quite large or well-known, their ability to attract growth is actually limited by channels. ETFs provide a very convenient way to reach the market, as some institutions may directly buy through ETFs, for example, many insurance companies only trade in the secondary market, without subscribing or going through the primary market.

Previously, insurance companies needed to look at similar types when investing in All Weather, etc., and the allocation would fall under stock allocation or major asset allocation, making decisions and then buying in, and selling later. From the perspective of decision-making or channels, it offers much greater convenience compared to previous models.

Gu Chengqi:

You just mentioned Covered Call ETFs, which have been particularly popular since 2022, both domestically and overseas. Do you think this type of structured ETF will become a very important category?

Wang Yi:

Stepping back, there is actually demand for Covered Calls at different market timings; it just depends on whether the market timing reaches that point. For a long time, things like helping plus calls were not valued because interest rates were very low, and the interest earned was insufficient to cover the Option Premium, resulting in annual losses. This just didn’t make sense.

But now, in a high-interest environment, many investment strategies have become effective. Many tools are not popular because they are currently in demand, but rather the entire market environment has brought them back, making their investments logical again. The same principle applies to anything that is "structured" and packaged into the ETF framework.

In the current market environment, or within the cognitive range of investors, if something is actually a good thing, it can be included and then made into an ETF tick to sell. More and more product innovations will develop in this direction in the future. For example, if I want to launch a Covered Call, I might need to launch a public fund, go through channels, and negotiate with each channel, but that opportunity may have already passed.

Now, launching a product and waiting for the wind to come is more straightforward; the first-mover advantage of ETFs is still quite obvious.

Gu Chengqi:

From the perspective of individual investors, didn’t they originally have no opportunity to access such products? For example, Xueqiu, which originally only high-net-worth clients could buy, although it may also lead to many losses, but indeed individual investors could not buy before. It’s somewhat like leverage and inverse products. Now, through ETFs, individual investors can buy such tools with just 100 or 1000 yuan.

Wang Yi:

It will lower the threshold for financial product tools because many tools do require a certain scale effect. If the scale is too small, the entire structure or cost is still relatively high. However, if it is treated as an ETF, the minimum share might require a basket of 2 million or 3 million to create, but splitting it into several shares is actually inconsequential, equivalent to trading split shares in the secondary market Main shares, whether entering all at once or according to the original minimum share, actually lowers the threshold for many financial instruments or products in a disguised manner.

ETFs may achieve globalization in the future, allowing investors to truly realize global asset allocation from home

Gu Chengqi:

ETFs are actually globalized; can one truly achieve global asset allocation, even full asset and full tool allocation, from home?

Wang Yi:

It sounds very tempting; in the past, it might have only been possible at a large institution.

Wang Yi:

As long as there is a trading account and a stock account, everything can be purchased.

Gu Chengqi:

In fact, a very important participant in ETFs is the index. There are only a few mainstream global indices overseas, and there may be a few more domestically. As a first-line participant, Vanguard, in order to save on index costs, even collaborated with a small index provider, CRSP. Does the index matter to you, or how do you generally consider different index providers when collaborating?

Wang Yi:

There is indeed a certain evolutionary path. In an environment without ETFs, the most successful index might be MSCI, as it is the biggest beneficiary of the globalization trend and global investment. Many index benchmarks or allocation benchmarks for overseas institutions are basically based on MSCI.

However, as a benchmark, a lot of MSCI's revenue actually comes from derivatives. Indeed, broad-based indices have a very good scale effect, and many people track it. But in reality, a significant portion of its revenue comes from derivatives references, as the trading volume of derivatives is quite large, with continuous issuance, termination, or trading, etc.

So the entire business model actually benefits from the whole globalization of investment. Of course, at the same time, many local indices are also doing well. The main representative indices of local exchanges in various markets also benefit.

In fact, whether local markets produce financial derivatives or serve as benchmarks, the main index references tend to be more, so they will also benefit. This was one of the main directions of benefit in the previous period, which is natural growth, and as more people reference it, fees can be collected from the trading level. MSCI also has a data fee issue.

In the next stage, we also see some new trends, such as those that align with the ETF trend. Because in the ETF business, everyone will issue mainstream indices, such as the CSI 300, A500, Russell 2000, or Nikkei, just by looking for these traditional index companies.

But when entering a customized index or a new field, it tests the innovation and adaptability of index companies. For example, if you want to find an AI index, how do you define an AI index? By revenue? Revenue involves different levels of data, such as fundamental data being used more, which has many technical details, but there are also different angles, and it can also use natural language to help create an index This company mentions AI, talks about various industries, and then it can be selected. Of course, the understanding of this matter varies among regulators in different regions, but there are also emerging index companies that are more in line with the development trend of ETFs, because ETFs are about try and error, which means launching a product to see if it can succeed.

We have launched many products, and in fact, many products have also been delisted. If something is not successful or the trend has passed, it needs to be delisted; it cannot just sit there and become a loss. Therefore, in the entire innovation field, there are some index companies abroad that people may not have heard of, but they are already large index companies in the market.

The top ten, such as the German company Selective, used to be an outsourcing provider for many index companies, and many technical levels were handled by them. After they obtained the index license, they could charge not a high fixed fee but a percentage fee. As you "grow," they still make money. However, negotiating with MSCI or other index companies is relatively difficult. Especially since they feel indifferent, designing an index together requires manpower costs, testing, etc. Now, various index companies are actually changing their business strategies.

Tokens allow traditional financial assets to face a new batch of investors

Gu Chengqi:

The last question is, the market has shown that ETFs are the most important wave of innovation in this round of finance. Looking ahead, many people mention a concept called tokenization. What do you think about this?

Wang Yi:

Because this is allowed in Hong Kong, and even the Securities and Futures Commission has corresponding projects, Project Orbis-Intraday Assembly is actually about tokenization. It is currently in the sandbox phase, and our company is also participating in this sandbox. This is all public information and can be found on the Securities and Futures Commission's website. So why is Hong Kong doing this? In fact, we also see that innovation in the financial sector is, on one hand, within the financial sector itself, but there is also cross-industry innovation. If we understand these on-chain innovative behaviors as financial innovation, they indeed erode the business chain of traditional finance at different levels, and RWA or tokenization is a manifestation of this, which is a way for products to land.

We now see that BlackRock also has the world's largest token for U.S. Treasury bonds. Although the scale is not large, it has already started investing in companies that are doing tokenization, technology companies. In fact, many well-known American companies like Franklin Templeton are also involved, so it is also building the next stage.

If tokens become the next leader or benchmark of financial innovation, when people talk about tokens, there is actually something that already exists on a large scale, such as USDT, which is considered the most successful case of tokenization In our research, we found that the field of tokenization is not about everything being able to be tokenized and sold, or that there will be trading for it. Many people wonder if we can tokenize Tesla or Nvidia. This was attempted a long time ago, but it was unsuccessful, with little trading and demand.

My personal understanding is that tokenization actually allows some traditional financial assets to face a brand new group of investors, which may have some overlap, but probably not much.

Therefore, investment decisions are always relative decisions. Comparing tokenization with what can currently be invested in is difficult to arbitrage, but there are very few risk-free assets on-chain, so USDT, token-market fit, and the development prospects of tokenizing U.S. Treasury bonds are viewed positively because they generate risk-free returns.

In the cryptocurrency space, there are still relatively few risk-free assets; there is always some counterparty risk or exchange risk, and complete avoidance is not really possible. Tokenization also has issues related to counterparty analysis, etc.

However, I find one phenomenon quite interesting: the largest RWV asset scale, besides the U.S. dollar, USDT, and USDC, is mortgage loans, which shocked me. There is a large on-chain mortgage company in the U.S. called Figure, which currently has an outstanding mortgage balance of about 9 billion, which is very substantial. This is also a way to penetrate traditional assets, "you give them your house as collateral, and they give you USDT," somewhat like a home loan or mortgage.

I have also heard that there are many innovations, debt restructuring, and technologies in the market that are helping with chain finance-related matters. Typically, after a bustle, banks fully exit, and funds enter, and after a round of the pandemic, a large number of people were swept away. Now, chain finance is somewhat in a transitional phase, and many innovations will occur along this chain, so it will integrate from different dimensions in the future. However, can anyone strictly replace anyone else? I think large companies, especially those like BlackRock, are also trying, and we still need to observe.

Gu Chengqi:

Our second round of ETFs is in full swing, and we see some signs and prospects for the third round, which we can pay attention to together.

Next Part

Zhu Chen:

In the second half, we will chat with Teacher Wang Yi about some recent market-related themes. Let's first talk about the product side; what star products does your company have recently?

Wang Yi:

Recently, we launched Mag 7, which was before Trump's election. It may be in the blockchain area Zhu Chen:

I remember you already had related products before, right?

Wang Yi:

There is an ETF for Bitcoin futures, but there isn't one for the blockchain industry. We have already made significant layouts in Southeast Asia, Japan, and Saudi Arabia.

Zhu Chen:

What about the domestic market?

Wang Yi:

It mainly depends on the new regulations that may come out for ETFs, the 60/40 allocation. Currently, everyone is mainly looking at Sino-U.S. technology. In principle, that 40 cannot be invested in fixed income, only in equities, so U.S. stocks may be the focus for everyone. Also, there is the recently released MLF, which is the mutual recognition fund's regulations, changing from 1:1 to 1:4, but this is mainly aimed at the bond market.

Zhu Chen:

From the flow perspective, which of your products are seeing significant flow from some overseas investors, such as EM and European and American investors?

Wang Yi:

Actually, after 924 and 926, the flow into China has increased quite a bit. The stable products are currently okay, and there hasn't been a large-scale withdrawal, "once they come in, they get stuck, and once stuck, they don't leave."

But there has indeed been a significant outflow from the U.S., for example, some A-share products from BlackRock, we have seen some outflows from Chinese products. But for us, it’s still okay, with only a small amount of outflow.

Zhu Chen:

Which institutions are mainly seeing inflows?

Wang Yi:

There are various directions, and I've even heard that there are quite a few from the U.S. The U.S. hasn't allocated to China for a long time, and suddenly there’s a surge, many funds or allocation institutions are also experiencing FOMO.

I've heard from foreign trading desks that a lot has come over from the U.S.

Zhu Chen:

They aren't really optimistic or think there’s a systemic shift; they just feel that the position is set well and is acceptable, moving from an ultra-low allocation to a less low allocation.

Wang Yi:

Yes, some are closing positions, and some are half closing and half reallocating. The Hong Kong stocks mainly see some position closing.

Markets like Saudi Arabia have no prejudice against Chinese stocks, focusing on real returns

Zhu Chen:

Recently, from the information I've received from you, which country or region in the world shows the highest interest in Chinese market assets, such as Hong Kong stocks, A-shares, or even Chinese bonds? Is there any region that particularly impresses you?

Wang Yi:

Actually, Saudi Arabia is quite good. I spent two weeks in Saudi Arabia, where I launched the largest Hong Kong stock ETF in the Middle East, raising $1 billion. During the roadshow, I found that Saudi Arabia's understanding of China is far greater than China's understanding of Saudi Arabia. They are not completely unaware of what is happening in China; they even know about real estate, the economy, and a series of details.

But they also look at this matter from a relatively long-term perspective, as there is still a lot of trade, whether it’s from crude oil imports, New Year exports, and so on. Moreover, they are also undergoing reforms, upgrading industries, and introducing some industries locally. So they don't have too many prejudices against China; their main concern is whether there are real returns and if they can make money. In Europe, the situation has actually been quite good, and there hasn't been much bias against Chinese investments.

In the Asian region, they have previously purchased quite a bit of Chinese goods. There is a gradual trend of moving away from pursuing Alpha.

We see that many foreign institutions, which may have previously set up teams in Hong Kong or even had teams domestically with some large sovereign funds, may no longer need that. If they really want to make allocations, they might just buy indices through ETFs to achieve their exposure to China.

Many institutions we interact with indeed have this direction, or some are already doing it, without needing a dedicated team to study China or anything like that.

Zhu Chen:

Actually, I want to ask more directly, when communicating with these investors, do they not really care about the so-called economic narratives or very detailed discussions in the domestic market? Are they more directly considering whether they can make money, if there are any recent catalysts, and using a more short-term mindset, or tactical and strategic thinking? What do you think the ratio is?

Wang Yi:

To put it bluntly, there has been too much talk about narratives. Every narrative essentially boils down to "this is a new policy, and it benefits something," etc. But at the end of the day, the result is that it surged and then came back, or whatever happened, there are no fundamental changes.

In their eyes, under the premise that substantive issues have not been resolved, such similar policies or relatively difficult-to-understand statements do not address actual problems and cannot help them make decisions.

Zhu Chen:

What do they want to see in order to make such decisions?

Wang Yi:

For example, the statements from the PBOC on 924 and 926, their reactions are quite positive, or they can understand it. But actually, understanding or not understanding is not that important; what matters more is the result.

There may be some small writings in the market, some front-running, or some expectations that have already been established, and then in the end, those expectations are not realized, leading to a series of discussions. The path of events may be the same as before, but now there are more disturbances, and the results of those disturbances may be relatively negative.

Zhu Chen:

Many disturbances are still dominated by foreign media, and the behavior of some foreign sell-side or investment bank researchers is relatively less, merely amplifying some viewpoints like foreign media.

I want to ask a conclusive question: is foreign capital optimistic or not, or is there any marginal change?

Wang Yi:

Regarding marginal changes, at least after the wave of 924, everyone is paying attention to the Chinese market, "Why did it rise, what policies are there?" At least in terms of attention, there has indeed been an increase. Additionally, there is a consensus that the government is doing something to help restore the economy, and the policy bottom is foreseeable. However, regarding whether the economy will get better, everyone still holds a reserved attitude.

The sequence of implementing Trump 2.0 policies will have a significant impact on the market

Zhu Chen:

Let's talk about Trump. Since Trump took office, many people have been discussing Trump trades, such as shorting U.S. Treasuries, going long on the dollar, and then rotating. Recently, many people have been saying not to invest in the Magnificent 7, but instead switch to 493, IWM, or even Cathie Wood There have been many changes in the market's trading structure or focus, and some policies may actually have an impact on EM as an entire asset class. Therefore, whether from a product or trading perspective, I would like to ask for your views on the Trump trade, and of course, you are also welcome to provide a direct conclusion.

Wang Yi:

In the second half of the year, we actually made a six-month outlook. At that time, the overall environment was that in August, everyone was still talking about the Federal Reserve's interest rate cuts, "a weaker dollar may not necessarily lead to inflows into EM," because fundamentally, everyone still wants to make money. Analyzing from various levels, we are still in a service sector cycle this time, not a commodity cycle. The EM countries that benefit from commodities, especially in Southeast Asia, do not have severe inflation.

So since the growth engine is still in DM, or looking at ROE and earning pressure, DM is better than EM from various dimensions. Why would anyone still stay in EM? It actually doesn't hold. After the second half of the year, we saw that even after the Federal Reserve's interest rate cuts, the funds flowing into the US stock market actually accelerated. Whether it's US Treasuries or US stocks, a large amount of capital has flowed back, continuing until now. Next year, we feel that there are too many overlapping factors in both positive and negative directions. In this case, I personally believe that the market is increasingly likely to experience repeated opportunities.

Which event happens first and which happens later will have a significant impact on the market. For example, whether Trump will impose tariffs on certain areas first, or whether he will raise tariffs first, or influence the market through other means, because he has too many viewpoints.

Moreover, the Trump trade itself is contradictory. Under this premise, which event happens first is actually very important for next year's trading, such as his tariffs and spending cuts. The main point is that Trump's election this time, compared to 1.0, has won a lot of incremental votes from lower and middle-class voters.

The core demand of this group is inflation, which conflicts with the potential secondary inflation that may arise from raising tariffs. It can be foreseen that in the mid-term elections or two years later, there won't be so many absolute majority seats. There is actually a lot of doubt about the repetitiveness of his policies. He also did some blusterous things during 1.0, claiming to impose tariffs on Europe, but in the end, he didn't, just to gain some other benefits.

This brings us back to which event will happen or which will happen first; the market will react. Just like the current market, I am now considering next year's debt ceiling issue or others, and then US Treasuries rebound wildly, yields rebound, but in a few days, if inflation is well controlled, the Federal Reserve becomes dovish again, and it comes back down.

Zhu Chen:

The Federal Reserve's behavior this time is indeed a bit strange, because the previous 50 basis point rate cut was somewhat overly dovish, and this time it feels like they are trying to make up for it. There seems to be some hidden concerns about recent inflation risks, and it feels like there is serious internal division among them.

Wang Yi:

Because now it is data-driven, and there is no way to react in advance to things that have not actually happened. To avoid appearing overly reactive later, they need to leave themselves some space Zhu Chen:

Many of his decisions are reactive ones made after the fact, unlike before when he might have had some foresight. Since misjudging inflation, he seems to have been stuck in this predicament.

Wang Yi:

Yes, after all, there still needs to be an explanation to Capitol Hill.

The U.S. economy shows signs of slowing down, optimistic about financial and tech stocks

Zhu Chen:

The S&P has actually performed very well for three consecutive years. A long time has passed since the inflation crisis in 2022, and the returns from the Magnificent Seven have been very good. However, we can see that some mid and small-cap stocks, including recent pharmaceutical stocks like Novo Nordisk and Eli Lilly, have not performed particularly well. The Dow has also seen ten consecutive declines. Returning to the actual trading issue, how do you view the overall trend of U.S. stocks next year?

Many people seem to say, including in Crypto, that expectations for excess returns next year should be lowered, and there are signs of a brake in the economy. What do you think?

Wang Yi:

We see signs of slowing down from various dimensions, whether it's from the revenue growth of the Magnificent Seven or future bottlenecks. There is now a certain shift, from chip bottlenecks to power bottlenecks, etc. Bottlenecks are always a major source of manufacturing price increases. If the bottleneck shifts, chips may become a BAU issue rather than a core concern that everyone focuses on, especially if there is plenty of production capacity.

Currently, the growth is actually okay; the only troublesome thing might be that Trump is very opposed to the chip bill. The core capex in the U.S. over the past two to three years has all come from this area, with very strong subsidies. So this story is actually similar to many things that happened in China; we are investing in infrastructure while others are subsidizing chips. This has driven overall investment, industry growth, and a series of trends, which is the capex generated by the Chip Act, and it has gradually declined recently.

From another perspective, other industries are indeed not doing well. People have been saying that tech is transitioning to the Russell 2000, Dow Jones, and the remaining companies in the S&P. Based on actual fundamentals, this has happened about four or five times this year.

The reason we have been optimistic about tech or Nasdaq over the past two years is that it is not afraid of a high-interest environment. However, all mid and small-cap stocks are victims of the high-interest environment. So under the condition that interest rates are still so high, although they have dropped a little, when there are still concerns about secondary inflation, trading mid and small-cap stocks now just because of Trump's trade protectionism? The logic seems a bit unconvincing. In terms of actual revenue, it has not brought about a substantial reversal for earnings reports or expectations, as basically many important stocks still miss; most still miss. The only two sectors that can beat expectations in the U.S. stock market now are tech and financials. The remaining sectors seem to be just okay.

Zhu Chen:

Recently, some strategists believe that it is possible to rotate into financials Wang Yi:

In terms of finance, we have always recommended large companies, while smaller ones are somewhat dragged down by the remaining companies. The pressure on small and medium-sized banks in the United States is still quite significant, and it ultimately comes back to the issue of high interest rates.

The U.S. market needs time to digest interest rate cuts; there is still a long way to go

Zhu Chen:

Essentially, if interest rates remain at this level next year, they may not have a good time either. If it leans towards a dovish stance, they might directly lower interest rates to neutral levels or even below. However, lowering rates below neutral levels has two rigid constraints: first, inflation must fall; second, the economy may not be doing well.

Wang Yi:

From a market perspective, it can be viewed this way: U.S. companies are mainly affected by interest rates through debt financing, primarily through corporate bonds, which have an average maturity of about 5-7 years. Assuming a 6-year average, it has been about 3 years since the high-interest environment of the pandemic passed. In the first and second years, many companies may not need to refinance. By the third and fourth years, more than 50%-60% of companies may have already begun to bear the burden of high interest rates. Therefore, the actual impact has already been reflected in their balance sheets.

The analysis of U.S. consumption follows the same logic. U.S. consumption is largely driven by 30-year mortgages, so why worry? The average mortgage rate is still below 4%, which is actually not a concern. Therefore, the proportion of cash purchases in the U.S. housing market has significantly increased; people are not borrowing money, and if it's expensive, they simply won't borrow. But as long as they can afford it, they will buy in cash. However, U.S. companies do not have this option.

Zhu Chen:

The impact of high interest rates is gradually being reflected in the pressure on their liabilities over time. Now that 2022 has passed, we have truly entered a period of "higher for longer." In 2022 and 2023, everyone expected rapid interest rate cuts, but two to three years have already passed.

Wang Yi:

So, it has accumulated some burden of high interest rates, and now that rates are really coming down, it will also take time to digest.

Zhu Chen:

The U.S. Treasury is also a significant victim, as interest payments are increasing. Lastly, let's talk about other major asset classes. One memorable event from last year was Goldman Sachs' multi-asset strategy, which predicted that all assets should be bought in 2024. Actually, if everything is bought, it’s still acceptable, as credit has performed quite well.

Wang Yi:

Credit is a historical mechanism, and I actually do not recommend buying it now.

Zhu Chen:

Last year, they predicted that this year would be a good time to buy stocks and bonds, including U.S. Treasuries, thinking that rates around 4% could be a buying opportunity. Now, from your perspective, assuming government bonds, credit, stocks, commodities, and crypto, how would you approach rebalancing?

Wang Yi:

From the perspective of major asset allocation, we still need to look at the changes in the efficient frontier. The most obvious trend from 2023 to 2024 is a downward shift. If we are doing this kind of major asset allocation, the expected returns on all risk assets have decreased, so it is reasonable to appropriately lower expectations for returns on risk assets From the perspective of allocation, everyone is more motivated to allocate risk-free assets like U.S. Treasuries, rebalancing a portion, especially when bond yields are rising. Now, a yield of 4.5% is very attractive.

If risk-free assets are already so high, the growth certainty on the other side is not as high. From this perspective, bond yields may not necessarily be low in the future, but the possibility of cash flow flowing into bonds will increase, putting pressure on stocks. In the past two years, actually, the bond and stock markets have been positively correlated, meaning when bonds fall, stocks fall, and when bonds rise, stocks rise. This indicates that the theory of major asset allocation has not been effective in this high-interest environment over the past few years, unless it returns to a normal low-interest rate level.

Because what is reflected now is that if inflation is well managed and I want to cut interest rates, the stock market will feel that future corporate costs will also decrease, and if the economy is well controlled, it is actually quite good, everything will turn around.

At this time, we feel that there may be some pressure to switch from the stock market to the bond market. Because stepping back, it’s not just the pressure on U.S. finances; in fact, all sovereign countries globally are under financial pressure, which reflects whether there are alternatives. Assets like gold and crypto may really serve as a substitute for sovereign credit, and this has indeed happened, because previously, crypto was often discussed in the context of issues like the over-issuance of the dollar. The popularity of crypto has instead driven the demand for the dollar.

Zhu Chen:

Sometimes you feel that it is inseparable from the development of the dollar zone, including stablecoins, and now it is even becoming a consideration for strategic reserves, which is indeed a miracle. In just over a decade, it can almost touch the balance sheets of the Treasury and the central bank.

Wang Yi:

But I think there is still a long way to go. For example, from the banking regulations in various places, it is still moving past without a definite statement. Regarding credit, I am not very optimistic about future credit because now, especially credit spreads have tightened to very extreme positions, and credit compensation is insufficient. However, the corporate side does not have such a good background, as companies that need to issue bonds are not strictly speaking all good, and various problems may arise.

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The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk