Published: 21:52, January 27, 2022 | Updated: 21:52, January 27, 2022
HK's Exchange Fund returns drop amid global uncertainties
By Oswald Chan

In this Dec 20, 2012 photo, a woman walks beneath signage for the Hong Kong Monetary Authority (HKMA).  (DALE DE LA REY / AFP)

Hong Kong’s Exchange Fund recorded an investment income of HK$170.5 billion ($21.88 billion) last year, representing a plunge of 27.6 percent from 2020, due to severe downside of the global asset markets in the second half of 2021.

Among the components of the Exchange Fund’s portfolio, bond investments gained HK$12.4 billion, other equities expanded HK$68.4 billion, other investments gained HK$93.9 billion, and there was a positive currency translation effect of HK$16.8 billion on non-Hong Kong dollar assets. Hong Kong equities lost HK$21 billion.

The Exchange Fund result represented an investment return of 3.6 percent last year, compared to 5.3 percent in 2020. The investment portfolio achieved a return of 3.7 percent while the backing portfolio gained 0.4 percent. The long-term growth portfolio recorded an annualized internal return of 15.3 percent since its inception in 2009 up to the end of September 2021.

Looking forward, the Hong Kong Monetary Authority - the manager of the Exchange Fund - said it expected this year’s investment environment to be highly uncertain

Looking forward, the Hong Kong Monetary Authority - the manager of the Exchange Fund - said it expected this year’s investment environment to be highly uncertain. More persistent inflation pressure around the globe may cause central banks to accelerate the pace of interest rate hikes, the HKMA said. 

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Moderating global economic recovery and growth of corporate earnings may lead to elevated global equity market valuations, it added, and the investment market may brace for a sharp equity market correction and rising bond yields. Other risks such as geopolitical tensions and the threat of new virus variants also post challenges for the HKMA.

“Interest rate tightening cycle will likely start thereafter. Should inflation prove to be more persistent, central banks may need to accelerate the pace of interest rate hikes, which may lead to greater volatility and corrections in asset markets,” HKMA Chief Executive Eddie Yue Wai-man said in the Thursday news conference.

“It is worth noting that global equity markets have risen sharply over the past three years with elevated valuations. As global economic recovery moderates with slowing growth momentum of corporate earnings and lingering concerns over new virus variants and geopolitical tensions, the investment environment will remain uncertain.”

“In case market sentiment takes a turn, global equity markets may undergo major adjustments. If bond yields also surge at the same time due to mounting inflation and policy shifts, there will be significant challenges to the investments of the Exchange Fund,” Yue cautioned.

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As the high inflation rate persists and employment continues its solid growth in the United States, the US Federal Reserve announced in its Wednesday meeting that it would accelerate the pace of asset purchase reduction and complete tapering in early March.

The Fed said it expects that rate hikes would soon be appropriate and the pace of monetary policy tightening could be faster than in the last tightening cycle.

Yue added that the HKMA will adopt a prudential, flexible and defensive investment approach so that the Exchange Fund can have a high degree of liquidity and be diversified to enjoy higher long-term returns. 

The Exchange Fund, which oversees over HK$4 trillion of assets, consists of the backing portfolio, investment portfolio and long-term growth portfolio to invest the Hong Kong government’s fiscal reserves with a view to maintaining the stability and integrity of the city’s monetary and financial systems.