The head of Hong Kong’s de-facto central bank gave a rare profit warning, saying the Exchange Fund would face a “triple-whammy” situation with equities, bonds and foreign exchange valuation falling at the same time if the US speeds up its interest-rate increases. “Moving into 2022, investors were treading on thin ice when managing their assets amid multiple uncertainties, ranging from the evolving pandemic situation and rising inflation, to policy shifts by major central banks,” said Eddie Yue Wai-man, chief executive of Hong Kong Monetary Authority (HKMA), which manages the HK$4.6 trillion (US$586.14 billion) Exchange Fund. He said the conflict between Russia and Ukraine was the “last straw” that triggered huge swings in the stock, bond and currency markets, posing significant challenges to investors all over the world, including the Exchange Fund. Yue’s warning came in an article published on the HKMA’s website on Monday, just ahead of the Exchange Fund’s first-quarter results on May 3. The Exchange Fund is the war chest used to defend the local currency from attacks by short sellers. It invest in stocks in Hong Kong and overseas, bonds and overseas properties and other long-term projects. While the Exchange Fund’s earnings declined 28 per cent last year to HK$170.5 billion, it showed a gain of HK$51.3 billion in the first quarter of 2021. The fund posted its worst quarterly result in the first three months of 2020 when it lost HK$112 billion, as it fell victim to the worldwide stock market slump when the Covid-19 pandemic started to spread. Unlike the past, where the markets experienced the usual phenomenon of “equities down, bonds up”, Yue said the first quarter saw a rare situation of “equities down, bonds down”. “In anticipation of inflationary pressure and tightening monetary policies by central banks, major sovereign bonds were under strong selling pressure, causing the bond prices to plummet,” Yue said, pointing to the Bloomberg US Treasury Index, which fell by 5.6 per cent overall in the quarter, the worst quarterly performance since 1973. The city’s benchmark Hang Seng Index lost 6 per cent while the Hang Seng Tech Index plummeted 20 per cent in the first quarter. The US S&P500 index also declined by 5 per cent. The US Dollar Index, meanwhile, has risen 6 per cent this year. “If the US accelerates the pace of monetary policy tightening relative to other economies, the US dollar could continue to strengthen against other major currencies,” Yue said. “In that case, the Exchange Fund would face a ‘triple-whammy’ situation with equities, bonds and foreign exchange valuation all falling at the same time.” The HK$1.2 trillion Mandatory Provident Fund (MPF) could show what is in store for the Exchange Fund. The MPF lost HK$76.2 billion, or 6.2 per cent, during the first quarter, according to MPF Ratings, an independent pensions research firm. “The first-quarter result of the Exchange Fund could definitely be its worst in recent years,” said Tom Chan Pak-lam, chairman of Hong Kong Institute of Securities Dealers. “It is a fact that both stocks and bonds fell in the first quarter, while currencies are falling against the US dollar. Such poor momentum in stocks, bonds and currencies may not be just limited to the first quarter but I fear that it may last the rest of the year.” Yue said the HKMA has made several adjustments to the Exchange Fund’s investments to reduce the impact of the interest-rate rises and strengthening US dollar. This includes increasing holdings of cash and floating-rate bonds and adjusting its foreign exchange exposure of non-US dollar assets. The Exchange Fund in recent years has also increased its Long-Term Growth Portfolio that invests in real estate and other long term projects. The portfolio has shown an annualised internal rate of return of 15.3 per cent since its inception in 2009 until the end of September last year. The fund will also continue to enhance the liquidity of the investment portfolios to ensure that it can maintain Hong Kong’s monetary and financial stability, and to support the government’s need to draw on fiscal reserves to cope with the pandemic, Yue said.