Weak bond markets and depreciating foreign currencies sparked a dramatic reversal in the performance of the Hong Kong government's flagship Exchange Fund.
It posted an investment loss of HK$25.2 billion in the second quarter, more than wiping out the gain of HK$19.1 billion in the first quarter. The first-half loss was HK$6.1 billion, compared with an increase of HK$38.9 billion in the same period last year.
That represents a return of minus 0.3 per cent, which still beat that of the Mandatory Provident Fund, at minus 0.56 per cent.
The macroeconomic environment was normalising from one of ultralow interest rates, posing a real challenge to the Exchange Fund's manager, the Hong Kong Monetary Authority, to generate positive returns, said Chan Kin-por, lawmaker for the insurance sector.
The city's de facto central bank had made changes in its asset allocation strategy to mitigate the impact of future United States interest rate rises, deputy chief executive Eddie Yue said on the HKMA's website yesterday.
Besides diversifying its portfolio to include private equity and overseas property, it had doubled the share of cash and cash equivalents, such as short-term paper, in the past three years, reduced the share of long-term bonds and increased the share of bonds denominated in currencies other than the US dollar and the euro, Yue said.
As market interest rates rose last month, bond prices fell, hurting the fund's portfolio, in which bonds still dominate.
HKMA chief executive Norman Chan Tak-lam, who was paid HK$9.41 million last year, blamed the "extremely volatile market environment" for "a small investment loss" in the first half. He said in a statement the investment environment would remain "very challenging".
Investments in bonds turned to a loss of HK$18.8 billion in the second quarter from a gain of HK$2.8 billion in the first. Losses on investments in foreign exchange and Hong Kong stocks deepened in the second quarter.
The Hang Seng Index fell 8.2 per cent in the first half. The yen depreciated 13 per cent against the US dollar, and the euro fell 1.4 per cent.
Raymond Yeung Yue-ting, a senior economist at ANZ Banking, suggested the Exchange Fund should shift its weighting to stocks over bonds. "Global stock markets usually perform better in the fourth quarter, and hopefully the Hang Seng Index will pick up in the second half," Yeung said.
The Exchange Fund, the main purpose of which is to maintain the Hong Kong dollar's peg against the US dollar, paid HK$18.8 billion into the government's fiscal reserves in the first half. After deducting fee payments, interest and other expenses, the fund's accumulated surplus fell by HK$35.1 billion.