Exchange Fund reports 2016 investment return of HK$61bn, in huge turnaround from 2015’s HK$15.8bn loss

HKMA’s chief executive Norman Chan Tak-Lam, however, warns on challenges ahead, and urges government to expect lower returns in future

PUBLISHED : Wednesday, 25 January, 2017, 4:48pm
UPDATED : Wednesday, 25 January, 2017, 11:26pm

The Exchange Fund, the local reserves held to defend the Hong Kong currency, reported investment gains of HK$61 billion last year, a sharp turnaround from a loss in 2015, thanks to better returns from stock market investments.

The gain compared with an investment loss of HK$15.8 billion in 2015, its second-worst performance ever as heavy foreign-exchange losses and poor returns from equity investments took their toll.

The result is considerably better than the gain of HK$44.7 billion 2014, but still below the HK$81.2 billion gain in 2013 and HK$111.6 billion gain in 2012, announced Hong Kong Monetary Authority (HKMA) chief executive Norman Chan Tak-lam on Wednesday.

Effectively the city’s central bank, the HKMA has invested HK$3.63 trillion worth of asset into the Exchange Fund, which includes the government’s fiscal reserves and other assets in Hong Kong and in overseas stocks, bonds and overseas properties.

The fund is used to maintain financial stability, including defending the dollar peg. The Exchange Fund also pays HK$23 billion to the Hong Kong government

The rate of return of the Exchange Fund last year stood at 1.8 per cent, compared with a loss of 0.6 per cent in 2015, but well behind the average return of 4.8 per cent over the past 22 years.

Despite of the solid full-year gain, the fourth quarter investment returns, however, suffered a loss at HK$30.4 billion, compared with the previous three quarterly gains of HK$47.1 billion in the third quarter, HK$18.9 billion in the second and HK$25.4 billion in the first.

The loss in the fourth was mainly due to forex losses of HK$19.3 billion and losses on bond yields of HK$17.7 billion, as well as a HK$8 billion loss on Hong Kong stocks – but that was offset by overseas stock gains of HK$14.6 billion.

“Last year was a year full of surprises and black swan in the markets,” Chan told a media briefing on Thursday.

“The stock markets in Hong Kong and many global markets fell, then there was Brexit in June, and Donald Trump was elected US President in November

“Global markets were also very volatile while the US dollar rose and the US interest rates increased. This led the non-US dollar assets of the Exchange Fund to suffer forex valuation losses,” he said.

“Although the fund lost HK$30.4 billion in the fourth quarter the full year gain was HK$61 billion which is not a bad performance amid a challenging investment environment.”

Chan, however, warned on a challenging investment outlook ahead.

The markets worldwide were full of surprises last year...But the year ahead will be even more difficult as we are not sure about the future outlook of euro amid Brexit and there are many European elections in the pipeline
Louis Tse Ming-kwong, director, VC Brokerage

“This year is going to be more difficult than last as there are various national elections planned in many countries, particularly in Europe. The new US government may well have spring some unpredicted policies. But the Exchange Fund will continue to keep a cautious investment strategy,” Chan said.

To address the strong US dollar, he said the fund had reduced its non-US dollar assets to 8 per cent of all investments, down from 17 per cent two years ago. He also believes the US will increase the interest rate by 2 to 3 times this year.

Louis Tse Ming-kwong, a director of VC Brokerage, also believes the Exchange Fund can expect a challenging year ahead.

“The markets worldwide were full of surprises last year and the fact The Exchange Fund can still produce a full year gain is not bad.

“But the year ahead will be even more difficult as we are not sure about the future outlook of euro amid Brexit and there are many European elections in the pipeline,” he said.

On a full-year basis, the fund made a foreign-exchange loss of HK$15.8 billion last year, compared with losses of HK$44.9 billion in 2015 and HK$52.7 billion in 2014. In 2013, it made a HK$1.6 billion gain. The forex loss of the Exchange Fund was mainly attributed to losses from its overseas assets in euros, Japanese yen and pounds against the US dollar.

The loss in the forex last year, however, was offset by Hong Kong stock investment gains of HK$5.3 billion, from a loss of HK$5 billion in 2015. The benchmark Hang Seng Index rose 0.4 per cent last year, compared with an annual fall of 7.3 per cent in 2015.

Gains from overseas stocks stood at HK$28.3 billion, compared with gains of HK$7.1 billion in 2015.

Its other investments, including overseas property investments, had a valuation gain of HK$10.2 billion for the nine months to the end of September, compared with full-year gain of HK$11.1 billion in 2015 and HK$9.9 billion annual gain recorded in 2014.

Gains from bond investments rose to HK$33 billion, almost double the HK$15.9 billion in 2015, down on the HK$47.3 billion gain in 2014.