Second wave of turmoil predicted Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong warned yesterday of a second wave of global financial turmoil after unveiling a full-year investment loss of HK$74.9 billion for the Exchange Fund, its first ever loss. 'We are seeing a new wave of volatilities, a new wave of difficulties being experienced by the financial system, particularly the banking system in Europe and America. 'I fear the new wave could be even more contagious than the first,' he said, referring to last September after US banking giant Lehman Brothers collapsed. The Exchange Fund, the reserve that backs the Hong Kong dollar, recorded a negative return of 5.6 per cent last year. An investment profit of HK$8.4 billion in the fourth quarter had helped to offset some of the losses in the first three quarters. Mr Yam attributed the investment losses, the first since the authority was set up in 1993, to the 'once-in-a-century' meltdown that had severely hit investor confidence. Major equity indices dropped by about 30 to 50 per cent last year, and other financial markets were also extremely volatile. He expected financial markets to remain volatile this year, noting that the first wave of the turmoil had weakened the fundamentals of some emerging markets. More bad news could lie ahead, too, as companies and financial institutions around the world, including Hong Kong, announced their results in the next two months. Equities investment accounted for most of the losses of the fund last year. Its combined valuation loss stood at HK$151.1 billion, of which HK$77.9 billion was posted by Hong Kong equities. The Hang Seng Index fell 48.27 per cent last year, its worst performance in 34 years. Mr Yam said the fund achieved a HK$3 billion investment income if the Hong Kong equities were excluded. The government bought the Hong Kong equities 10 years ago as part of efforts to contain the Asian financial turmoil. They were long-term investments that could not be sold. Law Ka-chung, chief economist and strategist at Hong Kong's Bank of Communications, suggested that the government should change the policy and allow the Exchange Fund to buy and sell shares if necessary. 'It could help to improve the performance of the fund,' he said. Foreign exchange also recorded a loss last year, of HK$12.4 billion, due to the depreciation of other currencies against the US dollar. Bonds, however, which comprised about 77 per cent of the fund, generated an investment return of HK$88.6 billion. The accumulated surplus of the fund fell HK$136.3 billion to HK$480.7 billion from the end of 2007. Total assets of the fund increased 10 per cent to HK$1.55 trillion.