Analysts say worst may not be over for Asian stock markets but advise MPF savers not to react impulsively to short-term shifts in sentiment RETIREMENT SAVINGS managed by the 307 funds authorised to invest Mandatory Provident Fund (MPF) contributions in Hong Kong were helped to strong investment gains in the first four months of the year as cash continued to flow into regional stock markets, pushing up share prices. But bond funds languished, and the rally by equity funds was interrupted by an exodus of liquidity last month as investors grew increasingly concerned about the impact on cash flows of rising interest rates. 'The key question is now whether the global bull market is ending, given the change in interest rates and the withdrawal of liquidity,' said Paul Chan, investment director and head of Hong Kong pensions for fund manager Invesco. But investing was not a 'sport', especially when it came to saving for retirement, Mr Chan added Even if it emerged that stock markets had peaked for the moment, he said, MPF savers should consider keeping faith with the allocations they made to equity-based funds and focus on the long-term, rather than react impulsively to short-term shifts in sentiment. 'It is difficult to generalise because members must make their own choices,' Mr Chan said. 'But what we try to make our customers understand is that MPF investing is not a competitive sport and individuals must decide on their own time horizons and risk appetite. In the longer run, equity will outperform bonds, and bonds will outperform cash; so we say investors should not be afraid of taking risks if their time frame is long enough.' Data compiled by fund market research company Lipper showed that Hong Kong MPF funds lost 2.2per cent on average last month, giving back the 2.49 per cent gain they recorded in April. That ended a six-month rally, but nonetheless left the year-to-date average return for all MPF funds at 4.76 per cent. Lipper senior research analyst Linbo Fan said among funds investing in developed regions, the decline last month was led by Equity Japan (minus 5.81 per cent) followed by Equity Europe (minus 5.01 per cent) - reverses that arose despite the appreciation of the yen and euro. Ratings agency Standard & Poor's added its voice to those advising caution. It said the worst might not be over for Asian stock prices. 'The lack of stability in Asian equity markets indicates there may be more falls yet to come - although the move is still only a correction and the medium-term outlook remains positive,' it said. Analysts said the money withdrawal that triggered the fall in regional share prices last month came as a result of concerns over the economic slowdowns in the United States and Europe from high oil prices and rising interest rates. Investors believed these developments would be bad for export-oriented economies in the emerging markets. Dutch Investment Bank ABN Amro pointed out that data from Emerging Portfolio Fund Research showed a net outflow of US$4.1billion from the Asia ex-Japan funds it covered, or 4.5 per cent of total assets before the fund redemption started. While this was not too substantial compared with a net inflow of US$15.1 billion in the first four months of this year, the 19.7 per cent drop in global benchmark provider MSCI's Asia ex-Japan Index between May 8 and June 14 had caused significant losses in regional funds, raising the possibility of another round of fund redemptions when fund investors received their statements, it said. Mr Fan said: 'We are starting to observe the impact of high oil and commodity prices on inflation and interest rates on a global level, and any signs of slowing of global economic growth are causing panic among investors. 'But whether there is a slowdown and how significant the slowdown will be remains to be seen. If it doesn't turn out to be too bad, investors may venture back into the equity market and things will go back to normal,' he said. Mr Chan said he believed US rates would continue their upward march to reach 5.5 per cent later this year as the Fed responded to a tightening labour market and a weakening dollar that would all add to pricing pressures and hence push up inflation. It was against this background that Invesco had turned cautious on equities about 12 months ago, he said, even though for the moment there was no sign yet of a turnaround in consumer confidence in the market, or an increase in loan delinquencies. But Mr Chan foresaw neither a recession nor a stagflationary environment emerging from this tightening which, he believed, would lead to no worse than a period of 'sub-standard' growth. Endorsing this view, research analysts at Swiss investment bank UBS advised their customers this month in their latest 'Global Investment Strategy' market comment that a turning point for the world economy had arrived, bringing down the curtain on four years of above-trend growth. UBS chief economist for Asia Jonathan Anderson said: 'From the economics side we believe a fundamental turning point for the world economy has arrived. 'At the same time, policymakers globally are moving focus to fighting inflation and removing liquidity.' While the outcome might be a 'soft landing', that did not necessarily mean that a 'soft take-off' would follow, he added. The advice UBS has for its customers - and that MPF investors may take into account if they are considering changes to their allocations - is that they may adjust their asset portfolios as follows: trim equities and commodities; add to cash and government bonds; within equities, overweight the US and cut exposure to Europe, Japan and Asia; and move to large caps globally and focus on health care, financial and industrial sectors. Mr Chan said contributors should hold their faith with equities and, depending on their time horizon, be prepared to take on more risk. 'The problem is that typically we still find that up to 20 per cent of MPF savings are invested in low-risk, conservative assets like capital guaranteed funds. 'There is nothing wrong with being defensive, but the returns of those funds have been in the low single digits,' Mr Chan said.