The Exchange Fund's investment income slumped 43.5 per cent in the first quarter to HK$17.1 billion amid a slide in stock markets.
Norman Chan Tak-lam, the chief executive of the Hong Kong Monetary Authority, which manages the fund, said the drop was due to the poor performance of the mainland stock market and the fact Hong Kong's equity and foreign exchange investments had gone into the red in the period.
"The unwinding of the yen carry trade may bring a new wave of capital flow to Asia and Hong Kong, but we have not seen this trend at the moment," Chan said, declining to forecast the performance outlook for the Exchange Fund this year. "The investment environment for 2013 is very uncertain."
Chan said it was hard to predict the effect of fund flows to Hong Kong and the stock market. The authority aims to maintain a good position to cope with the uncertain investment outlook through a balanced and prudential approach, he said.
The HKMA is responsible to the financial secretary for the use and investment management of the Exchange Fund. The fund paid HK$9.3 billion to the government's fiscal reserve in the period.
Thanks to a stronger performance of stock markets in the US and Japan, Chan said the fund had a return of HK$24.9 billion in assets classified as "other stocks" in the period, offsetting the loss on Hong Kong stocks and foreign exchange of HK$1.4 billion and HK$9.8 billion, respectively, in the first quarter. Bonds provided a return of HK$2.8 billion and alternative investments gained HK$600 million.
The Hang Seng Index fell 1.5 per cent and the Shanghai Composite Index dropped 1.4 per cent in the first quarter.
"The markets were [affected] because the central government printed more money," said Raymond Yeung Yue-ting, a senior economist at ANZ Banking in Hong Kong. He questions whether the good performance of the US and Japanese stock markets is sustainable.
Yeung expects the Exchange Fund to be challenged in the second half of this year as central governments might start to tighten up quantitative easing measures.
The fund has to hold assets of high liquidity and good quality and most asset allocations are denominated in US dollars, Chan said.
The fund's primary objective, as laid down in its ordinance, is to affect the exchange value of the currency of Hong Kong either directly or indirectly. The fund may also be used to maintain the stability and integrity of Hong Kong's monetary and financial systems to help preserve the city as an international financial centre.