Mandatory Provident Fund: are HK equities a wise investment choice after last month’s rout?

04-Jun-2020 Intellasia | South China Morning Post | 6:02 AM Print This Post

Hong Kong’s three million employees covered by the city’s compulsory pension fund face a difficult choice: should they stick with their Mandatory Provident Fund (MPF) portfolio or make wholesale changes after last month’s rout.

With the city’s stock market becoming the sentiment barometer for rising US-China tensions and given the uncertain economic outlook, some analysts say it is the right time to buy beaten-down equities while others advocate diversification into other markets.

The 44 Hong Kong stock funds under the MPF plan reported a 4 per cent loss on average in May, the worst performer among all fund categories, according to data from Refinitiv Lipper. In comparison, all 414 investment funds produced an average gain of 0.8 per cent.

The MPF had HK$969.46 billion (US$125 billion) of assets in 2019, with about one-third invested in local stocks, according to regulatory data. Hong Kong dollar deposits took up 14 per cent, while US stocks and Hong Kong bonds each accounted for 11 per cent.

“Looking ahead, it seems a V-shaped global economy recovery is unlikely, as the pandemic has disrupted not only the supply chain but also the desire on the demand side,” said Elvin Yu, chief executive of Goji Consulting, a pension consultancy.

“Selective sectors are badly hit, and even large corporations cannot avoid the financial impact. For the rest of this year, volatility in Hong Kong and mainland stock markets is unavoidable, and there would be more downside risk than upside reward.”

Hong Kong stock funds underperformed their peers within MPF last month, according to Lipper. Japanese equity funds were the best of them, with average gain of 6.6 per cent, followed by US equity funds at 4.8 per cent and European equity funds at 3.8 per cent.

The poor returns of the Hong Kong stock funds came as the Hang Seng Index fell 6.8 per cent in May, making it Asia’s worst performing benchmark. On May 22, the index tumbled by the most in almost five years after Beijing said it plans to pass a national security law that will curb secession and sedition in the city.

In the first two trading days of this month, however, the index has risen 4.5 per cent amid buying from mainland traders, recouping all the losses since the May 21 announcement by the National People’s Congress.

With about one-third of MPF assets invested in local stock market, “the performance of Hang Seng Index affects that of MPF’s a lot,” said Kenrick Chung, general manager of employee benefits at Realife Insurance Brokers. Thus, MPF members should diversify their asset allocation and take a broader look at the Asian markets against the backdrop of rising US-China tensions, he added.

Others however said that investors should not rush into any decisions because of short-term setbacks.

Kenny Ng Lai-yin, a securities strategist at Everbright Sun Hung Kai, said investors should stick with their investments in Hong Kong and China markets. Both are trading at relatively low valuations compared to other global equity markets, he said.

“We have a positive view for the Hang Seng Index for the second half, which we believe will reach as high as 26,500,” he said, compared to the current level of about 24,300 points. “Therefore, we recommend that MPF investors keep a certain portion [of their funds] in Hong Kong and mainland markets to seize the opportunities.”

Employers and employees in Hong Kong contribute 5 per cent of monthly salary into the pension fund, with employees deciding how to allocate their money into different investment fund choices.


Category: Hong Kong

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