According to the Wise Financial APP, on October 10, Hang Seng Index Company announced that on September 19 (Hong Kong Time), the Federal Reserve lowered the federal funds rate by 50 basis points to a range of 4.75%-5.00%, the first rate cut in over four years. The latest forecast from the Federal Open Market Committee (FOMC) indicates that by the end of 2026, the federal funds rate will be further reduced by a total of 200 basis points to a range of 2.75%-3.00%, indicating that a rate cut cycle may have begun.

It is worth noting that income-generating investments focus on long-term returns rather than market fluctuations, representing one of the investment strategies that seek high total returns and low volatility. The Hang Seng High Dividend Yield Index (HSHDYI) can track the performance of quality companies that maintain stable dividends, reflecting a more substantial total return over the long term (0.44 times, compared to the market's 0.21 times). As of October 4, the dividend yield of the Hang Seng High Dividend Yield Index is 5.8%.

• Income-generating investment strategies possess long-term risk-adjusted total returns.

On September 19, 2024 (Hong Kong Time), the Federal Reserve lowered the federal funds rate by 50 basis points to a range of 4.75%-5.00%, higher than expected (market expectation was a cut of 25 basis points), marking the first rate cut in over four years. The aim of this rate cut by the Federal Reserve is to boost the U.S. labor market, as the FOMC's confidence in continuing towards the 2% inflation target has strengthened. Regarding the rate trajectory, Federal Reserve Chair Powell stated that a 50 basis point cut should not be seen as a new pace.

It is worth noting that the latest FOMC forecast predicts that the federal funds rate will be further reduced by 50 basis points/100 basis points/50 basis points in 2024/2025/2026 respectively, which means that by the end of 2026, the rate is expected to be reduced by a total of 200 basis points to a range of 2.75%-3.00%. The rate cut cycle may have begun.

Due to the linked exchange rate system, the benchmark interest rate in Hong Kong was also lowered by 50 basis points, marking the first rate cut in over four years for Hong Kong. Following the rate cut, the Hong Kong stock market rose by 3.2% over the following two trading days (September 19-20), with sectors sensitive to interest rates showing more pronounced performance. Additionally, after the introduction of new policies by the mainland on September 24, 2024, the Hong Kong stock market further rebounded by 25.3% from September 20 to October 4.

Income-generating investments focus on long-term returns rather than short-term market volatility or fluctuations, representing one of the investment strategies that seek high total returns and low volatility. As of October 4, 2024, the dividend yield of the Hang Seng High Dividend Yield Index is 5.8% (Figure 1), higher by 2.6 percentage points compared to the broader market (represented by the Hang Seng Composite Index (HSCI)). Furthermore, the dividend yield of the Hang Seng High Dividend Yield Index is 2.9 percentage points higher than the yield of Hong Kong's 10-year bonds (Figure 2).

From a long-term perspective (since March 2013), the total return of the Hang Seng High Dividend Yield Index is mainly contributed by dividend income (Chart 10), so its risk-adjusted total return (0.44 times) is higher than the market's 0.21 times (Chart 11). The Hang Seng High Dividend Yield Index can reflect a more significant long-term risk-adjusted total return by tracking stable dividend-paying quality companies.

• Component stocks are adjusted in a timely manner to closely match the constantly changing market environment.

The Hang Seng High Dividend Yield Index aims to reflect the overall performance of high dividend securities listed in Hong Kong. In terms of index composition, the Hang Seng High Dividend Yield Index is weighted based on net dividend yield (i.e., dividend yield after tax deduction), selecting stocks from the Hang Seng Composite Index's large and mid-cap constituents, with a maximum individual stock weight limit of 10%.

In addition to trading volume requirements, the constituent stocks of the Hang Seng High Dividend Yield Index must also have a record of cash dividends for at least three consecutive fiscal years. In terms of volatility, securities ranking in the top 25% of historical annualized volatility over one year will be excluded from the stock selection category to avoid including highly volatile component stocks. Additionally, securities meeting the following two conditions will also be excluded from the stock selection category:

i) Stocks that have dropped more than 50% in price over the past 12 months; (ii) Stocks that rank in the bottom 10% of eligible candidate component stocks based on price performance in the past 12 months. The top 50 securities ranked by net dividend yield will be selected as constituent stocks of the Hang Seng High Dividend Yield Index. Please note that if the dividend yield of candidate component stocks is exceptionally high, Hang Seng Index Company reserves the right to exclude them from the index's constituent stock selection.

Overall, the index calculation method of the Hang Seng High Dividend Yield Index demonstrates its responsiveness to the constantly changing environment, maintaining the characteristics of high dividend yield and low volatility. As of the third quarter of 2024, the top three industries are finance (37% weight), real estate and construction (15% weight), and energy (13% weight) (Chart 8). Compared to the same period last year, the finance sector saw the largest increase of 8.0 percentage points to 37%. In contrast, the energy sector experienced the largest decline, dropping by 5.8 percentage points to 8%. The combined weight of the top 10 constituent stocks accounts for 27.1% (Chart 9).

• Hang Seng High Dividend Yield Index: Dividend income contributes significantly to total return.

From March 2013 to October 4, 2024, over the long-term period, the Hang Seng High Dividend Yield Index recorded a +8.6% price return, while the total return (price return + dividend return) was +132.0% (Chart 10). Calculated on an annualized basis, the price return is +0.7%, the annualized composite dividend yield is approximately +7.0%, and the overall annualized total return is +7.7% [= 7.0% + 0.7%]. In other words, the total return of the Hang Seng High Dividend Yield Index during the period stems from reinvested dividend returns plus price gains.

• The Hang Seng High Dividend Yield Index has outperformed the market by 3.4 percentage points on an annualized basis.

From a long-term perspective, since March 2013 (as of October 4, 2024), the Hang Seng High Dividend Yield Index has recorded a total return of 132.0% (with an annualized total return of +7.7%), outperforming the market (Hang Seng Composite Index annualized total return of +4.4%) by approximately 3.4 percentage points on an annualized basis (Figure 11). The Hang Seng High Dividend Yield Index has a lower annualized volatility of 17.8% compared to 20.9% for the Hang Seng Composite Index; its risk-adjusted total return (annualized total return / annualized volatility) is 0.44 times, higher than 0.21 times for the Hang Seng Composite Index.

编辑/Wade