HK’s Exchange Fund posts record first-quarter returns due to investment gains in stocks, bonds and currencies

07-May-2019 Intellasia | South China Morning Post | 6:00 AM Print This Post

The Exchange Fund, Hong Kong’s war chest for keeping the city’s currency stable against short sellers, has reported its best first quarter on record, as stock market rallies around the world bolstered the returns on its investments.

Investment returns more than tripled to HK$120.9 billion (US$15.4 billion) in the first three months of 2019, from HK$35 billion in the same quarter last year, according to the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank. This is the ever strongest quarterly gain on record.

The main driver of the fund’s growth had been its stock market investments, where gains in its Hong Kong equity holdings jumped 11 times to HK$20.8 billion during the quarter, from HK$1.7 billion last year.

The city’s benchmark Hang Seng Index and the China Enterprises Index both rose by about 12.4 per cent during the period, wiping out last year’s 14 per cent loss, ranking as the 16th and 17th best-performing indices out of 94 global gauges tracked by Bloomberg. The market had been lifted by the Chinese government’s economic stimulus measures to maintain growth in Asia’s growth engine, and a dovish monetary policy stance by the US Federal Reserve to pause any increase in interest rates.

The Exchange Fund, which also invests outside Hong Kong, was also given a lift from stock market rallies elsewhere. Overseas equity investments returned the fund HK$49.9 billion in the first three months, compared with a loss of HK$7.4 billion last year.

The S&P 500 Index in the US rose 13 per cent in the first quarter, while the Dow Jones Industrial Average gained 11.2 per cent and the Nasdaq Composite Index advanced by 16.5 per cent.

The HKMA has invested the Exchange Fund’s assets comprising the government’s fiscal reserves and other local assets into equities, bonds and overseas properties, and some infrastructure projects in Europe and South America.

Bond investments gained HK$36.7 billion in the first quarter, up from HK$5.5 billion last year. Foreign exchange gains mainly from the translation of foreign-currency assets into Hong Kong dollars fell to HK$13.5 billion, compared with HK$26.3 billion last year.

“It is unusual to see all three major sectors of stocks, bonds and currencies on a rising trend,” HKMA’s chief executive Norman Chan Tak-lam said in a meeting with the financial affairs panel at the city’s Legislative Council. “The rallies of different sectors in the first quarter are rarely seen.”

For its investment, the Hong Kong government received HK$7.7 billion in dividends for the quarter, compared with HK$5.6 billion a year earlier.

The strong gains marked a good start to the year for the Exchange Fund. It is a turnaround from a loss of HK$33.6 billion in the fourth quarter last year. The fund’s investments tumbled 94.7 per cent to HK$13.9 billion last year, a victim of the worldwide stock market slump amid concerns over the year-long US-China trade war and rising interest rates.

The poor performance in 2018 followed a bumper year in 2017, when returns jumped to HK$264 billion, tracking the 36 per cent increase in the Hang Seng Index.

The fund’s dependence on market vagaries underscores the uncertainties that still linger, HKMA’s Chan said, pointing to the US President Donald Trump’s surprise tweet overnight, which caused Asian stock markets to slump.

“We should note that market sentiments change all the time,” Chan said, adding that Hong Kong “definitely” will be affected by the trade war. “While the market has widely believed the US and China would reach a trade deal, Trump surprised the market by saying the US will increase tariffs. This shows that the stock markets worldwide are still full of uncertainties.

“If trade negotiations break down, global investment markets will face substantial downside risks. This will affect the future performance of the Exchange Fund in the second quarter and thereafter.”

Ben Kwong Man-bun, a director of Hong Kong brokerage firm KGI Asia, said global market sentiments on a US-China trade deal have turned from optimistic to cautious after [US President] Donald Trump’s latest remark, adding that major central banks could be forced to take action that may affect equity markets worldwide.

“This may lead to economic downturns, and Trump may add more pressure to force the US Federal Reserve to cut interest rates. The People’s Bank of China may also consider introducing more measures to boost the economy.

“Under such circumstances, Hong Kong and other global markets will face a bumpy ride for rest of this year. The Exchange Fund, as well as many other investment funds, will face a lot of volatility ahead,” Kwong said.

Lawmakers praised Chan’s contribution during Monday’s meeting, which marked his final appearance before the Legco Financial Affairs Panel, as he retires at the end of September. Chan, the HKMA’s chief executive since October 2009, briefs lawmakers thrice a year on the state of the banking sector and the Exchange Fund’s performance.


Category: Hong Kong

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