HK Exchange Fund to stay prudent after woeful results

The HKMA warns that the global investment environment will become more challenging in the second half of the year, after posting an investment loss of HK$7.7 billion in the last quarter.
HK Exchange Fund to stay prudent after woeful results

The Hong Kong Monetary Authority aims to keep “prudently” investing its Exchange Fund through asset diversification and defensive measures, after global stock market volatility gouged a big hole in its first half returns, according to executives from the de facto central bank.

The HK$4.1 trillion ($522.39 billion) fund, which is responsible for supporting the currency peg between the Hong Kong dollar and US dollar, reported a loss of HK$7.7 billion in the second quarter, its first such drop since the fourth quarter of 2016.

The fund’s unaudited results released last Friday showed that it earned HK$27.3 billion in investment returns for the first half of the year, about 80% lower than the same period of 2017.

HKMA, which manages the Exchange Fund, attributed the poor performance largely to the volatility in global equity markets, which experienced sharp corrections after reaching new highs at end-January. Its equities portfolio suffered a HK$6.1 billion loss, after returning HK$67.9 billion a year before.

Market peaks and troughs have been particularly evident in US equities, as represented by the S&P 500 Index. The Dow Jones Industrial Average Index, another benchmark of the US stock market, lost 1,175 points in one day on February 5, its worst single-day point decline in history.

“As we have warned at the beginning of the year, asset prices in the global financial markets were in general at their historical highs and the markets might have underpriced some risk factors,” Norman Chan, chief executive of the HKMA, said in a statement.

Exchange Fund investment results as of June 2018 (HK$, bn)   Source: HKMA

The fund also reported that its year-on-year returns from foreign exchange investments dropped by 85% during the first half. The HKMA noted that the US dollar strengthened in the second quarter, while asset prices in some emerging markets fell substantially.

‘Other investments’, which consist of valuation changes of private equity and real estate investments held in the Exchange Fund’s Long-Term Growth Portfolio, also saw investment returns fall by about 50% on a year-on-year basis.

As of June 2017, HKMA invested about 70% of its assets under management in debt securities. Hong Kong and international equities comprised about 18% of the portfolio, while deposits and other assets accounted for 6% apiece.


The collapse in first-half returns is unwelcome news for the Exchange Fund, but it stands largely in line with the portfolios of other asset owners, according to Jayne Bok, head of investments for Asia at Willis Towers Watson.

Many investors are considering how best to strengthen their portfolios amid increased volatility, with an increasing number have been running various economic scenarios, Bok told AsianInvestor.

Chan said the HKMA planned to respond to the market fluctuations by continuing to strengthen the Exchange Fund’s resilience through defensive measures and investment diversification.

The HKMA spokesman added that the Exchange Fund's investment objectives are to preserve capital, maintain a high level of liquidity, and help preserve its long-term purchasing power. To achieve relatively stable medium- to long-term returns, the fund adopts a prudent asset allocation framework with diversified asset classes, he asserted. 

"There is a certain degree of flexibility under this framework that allows appropriate fine-tuning in response to market changes,” the spokesman said, declining to offer any specifics about potential asset allocation changes in response to current market conditions.

Adapting the investment strategy to greater volatility makes sense, given that the second half of 2018 could also prove to be difficult.

The global investment environment is set to become even more challenging in the second half of the year, given trade tensions between the US and other nations, and the US Federal Reserve likely to tighten its monetary policy, a HKMA spokesman said in an email reply to AsianInvestor questions.

The sentiment echoed Chan’s earlier statement. “As trade conflicts between the US and China continue to escalate, trade tensions between the US and other countries are also intensifying. It is hard to predict what will happen next,” he said, in agreement with other asset owners in the region.

Chan also noted that the Federal Reserve’s desire to increase the pace and magnitude of its monetary policy tightening could add to volatility.

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