Defensive Assets in Focus as Markets Brace for U.S. Tariff Deadline and Dollar Weakness

On July 9, global investors are closely monitoring the resolution of U.S. tariff negotiations, with rising expectations that defensive assets will outperform amid policy uncertainty. The recent passage of the “Big and Beautiful” tax and spending legislation by the U.S. Senate has heightened bearish pressure on the dollar. Following the implementation of reciprocal tariffs in April, the dollar index has dropped by over 7%, while various Asian currencies have rebounded to levels last seen in October.

Investor sentiment is increasingly cautious due to unclear U.S. trade direction. Consequently, capital is flowing toward low-risk assets, with Hong Kong equities gaining attention. Their depressed valuation and improvements in corporate governance among mainland-listed companies have sparked renewed interest in undervalued blue chips.

With the July 9 deadline approaching, anticipation over trade talks has triggered broad appreciation in non-dollar currencies and capital outflows from dollar-based instruments. In the first half of 2024, the dollar index declined 10.8%, marking its worst six-month performance since 1973. On July 2, it hovered near 96, while the offshore yuan strengthened to 7.1493 per dollar, its best level since November. Other regional currencies, such as the ringgit, won, baht, and Singapore dollar, also reached multi-month or multi-year highs.

On July 1, the U.S. Senate approved the “Big and Beautiful” tax package. Forecasts show this version could expand the fiscal deficit by $3.9 trillion over ten years, surpassing the $3 trillion increase proposed in the House bill. This has sparked broader concerns about long-term U.S. fiscal sustainability.

Amid rising trade risks, mounting U.S. debt, and questions about Federal Reserve independence, analysts anticipate continued dollar weakness. Citigroup recently warned that downside risks for the greenback are asymmetric, noting historical patterns where dollar depreciation follows periods of U.S. underperformance during global economic soft landings, reinforcing a sell-on-strength strategy.

Institutional reports underscore the importance of monitoring July’s tariff developments and volatility in U.S. and Japanese bond markets. The tariff announcement in April triggered sharp movements across equities, bonds, and currencies worldwide. With many institutions holding back on reallocation, defensive instruments have seen increased attention. Hong Kong’s market, influenced by both offshore and mainland capital, remains highly sensitive to central bank policy signals, geopolitical risk, and exchange rate dynamics, strengthening its role as a defensive investment avenue.

The decline in the dollar since May has coincided with easing liquidity conditions in Hong Kong. One-month Hibor has dropped to 0.52%, and the overnight rate approached zero, the lowest point since 2000, indicating ample liquidity.

Hong Hao, Chief Investment Officer at Lotus Capital, suggested that Hong Kong stocks may become the next preferred haven for global investors following the gold rally. He anticipates a multi-year decline in the dollar and sees growing skepticism about its safe-haven status. With China encouraging improved shareholder returns from state-owned enterprises, rising dividends are perceived as an indicator of governance reforms. This mirrors efforts in Japan and South Korea that have attracted foreign capital, and a similar trend is expected to lift Hong Kong equities. Ongoing capital inflows are fueling a revaluation of discounted blue chips in Hong Kong. The CSI Hong Kong Central SOE Dividend ETF (513910), which tracks high-yield state-owned firms, saw its assets grow by RMB 1.25 billion in the first half of 2024, a 73% increase, now surpassing RMB 3 billion in total.

Relative to major global equity markets, Hong Kong stocks remain notably undervalued. According to Bloomberg, the Hang Seng Index is projected to have a 2025 forward price-to-earnings ratio of 11x, a price-to-book ratio of 1.2x, and a dividend yield forecast of 3.2%. Sectors with stable payouts, such as banking, telecom, and utilities, offer yields over 5%, reinforcing the region’s attractiveness for investors adjusting away from dollar-heavy portfolios.