Bearish sentiment could peg back Exchange Fund returns
The Hong Kong fund's investment income broke all records in 2017, but investors are bracing for tougher conditions this year
First, the good news. Hong Kong Exchange Fund investors ended 2017 HK$34,520 (US$4,425) richer on average, thanks to the fund’s record-breaking investment income of HK$252 billion (US$32.3 billion).
Yet, the 7.1% return from the fund, which is managed by the Hong Kong Monetary Authority (HKMA), was still less than the yield of most pension funds last year — not to mention the Hang Seng Index, which led the world’s major equity markets with a stellar 36% return.
The Exchange Fund, whose role has been to support the Hong Kong dollar since it was pegged to the US dollar in 1983, stood at HK$4.02 trillion (US$514 billion) at the end of the year, or about HK$551,000 per capita.
All four quarters produced decent returns, thanks to strong performances by equities, currencies and bonds, though bonds accounted for 78% of the investment portfolio.
The fund pulled in HK$54 billion in the fourth quarter, which reversed a loss in the corresponding quarter in 2016, but this was still the lowest quarterly return of the year.
Equities accounted for most of the gains with HK$138.5 billion, including HK$80.2 billion from global markets. The local portion of HK$58.3 billion got a big helping from the bullish sentiment in China stocks.
HKMA chief executive Norman Chan said the returns surpassed all expectations, adding that the weak US dollar had produced a favorable investment environment.
But Chan, who will finish his second five-year term as head of the de facto central bank at the age of 64 in September 2019, cautioned it would be hard to repeat the 2017 performance this year.
He noted that financial assets were pushed higher than historic levels last year by a wave of optimism that is unlikely to be repeated as more bearish sentiment sweeps through equity markets in 2018.
The Exchange Fund produced its best return since 2009, when it recorded a HK$142.2 billion yield while bouncing back from the global financial tsunami.
But 2017 was only the seventh-best for investment returns. Since the fund’s establishment in 1993, the average return has been 4.9%, which compares well with an average 2.1% inflation rate in the last 24 years.
Even so, the investment scorecard will be the envy of investors in most other parts of the world.