Hong Kong Exchange Fund reaps financial rewards
- Strong bond market drives rebound by war chest that helps defend Hong Kong dollar and hopes are high it will continue
The Hong Kong Exchange Fund is for long-term investment. Recent short-term market volatilities, though, have produced attention-grabbing headlines.
They are a useful reminder that the fund belongs to Hong Kong people, who should periodically inspect its ups and downs to make sure those put in charge of it are doing their job properly. The good news is that the fund has reported a big rebound so far this year, after a strong bond market helped narrow third-quarter losses.
Its investments gained HK$110.9 billion in the first nine months, a turnaround from the record loss of HK$278.8 billion last year.
The fund had a HK$5.5 billion loss in the last quarter, which significantly narrowed from a loss of HK$113 billion during the same period a year earlier, the third-biggest quarterly loss on record.
Set up to defend the Hong Kong-US dollar peg, its investment performance tracks the directions of the overall market and interest rates. With the local base rate and that of the US Federal Reserve’s target rate hovering at 5-plus per cent, bonds have been doing well.
That has offset the slump in the stock market.
Roughly, the fund allocates 72 per cent of its investments to bonds, 12.3 per cent to offshore equities, 6.6 per cent to deposits, 5.1 per cent to overseas property and other private-equity investments, and 4 per cent to local stocks.
Its size recovered to HK$3.9 trillion at the end of September, approaching where it was before the social tumult of 2019 and after three years of Covid-19 shutdown. That puts it at seventh place out of the top 10 largest foreign reserves around the world.
Hong Kong Exchange Fund rebounds from record loss with US$14.22 billion return
The Hong Kong Monetary Authority has had to step into the market several times to defend the local dollar amid capital outflows this year. But it looks like the job is done and the Hong Kong dollar is stabilised at the stronger half of its trading band.
While external economic factors, coupled with geopolitical tensions, make outlooks for next year uncertain, the rate increases may be over for the US Fed, which may even reverse direction. It’s not unreasonable, then, to hope for a better performance from the Exchange Fund next year.
