July 28, 2022
HONG KONG – The Hong Kong Monetary Authority will continue to diversify investments to stabilize the Exchange Fund’s long-term returns, as the investment climate is expected to remain difficult after witnessing prices nose-dive across almost all types of assets in the first half of the year.
HKMA Chief Executive Eddie Yue Wai-man made the remarks in an article posted on Tuesday on the de facto central bank’s website.
With uncertainties rising sharply in markets, investors rushed to sell off their assets, leading to a concurrent fall in equity and bond prices as well as currency exchange rates against the US dollar in the second quarter.
Eddie Yue, HKMA chief executive
After encountering a rare occurrence of “equities down, bonds down” in the first three months of the year, the already battered financial markets were further hit by a “perfect storm” in the second quarter, Yue said.
The prolonged and destructive storm was a culmination of several factors, including lingering geopolitical tensions, tightening monetary policies by central banks to contain inflationary pressures, bearish investor sentiment, as well as stringent pandemic prevention measures, he said.
“With uncertainties rising sharply in markets, investors rushed to sell off their assets, leading to a concurrent fall in equity and bond prices as well as currency exchange rates against the US dollar in the second quarter,” Yue said.
The asset-price declines were even more severe than those in the first quarter. For instance, the US S&P 500 index fell by 4.9 percent in the first quarter, and by a further 16.4 percent in the second quarter.
“In summary, multiple asset classes recorded a double-digit price fall in the first half of the year, which was quite rare in many decades,” Yue said.
Caught in this perfect storm, the Exchange Fund, which aims to safeguard the exchange value of the Hong Kong dollar, is expected to suffer a “significant loss” in the first half of the year, Yue said.
Yue, however, said “the destructive impact of the perfect storm has been somewhat mitigated”, as the Exchange Fund has adopted “diversified long-term asset allocation and defensive measures” as well as “strategic adjustments”, such as increased holdings of cash and floating-rate bonds, the adjusted proportion of non-US dollar assets, and the holding of inflation-linked investment products.
He said he also expects higher interest rates to increase the bond portfolio’s interest income, which could partly offset the losses caused by falling bond prices, though the investment environment in the second half of the year is still fraught with challenges.
The Exchange Fund will remain committed to the principle of “capital preservation first while maintaining long-term growth”, regardless of substantial market volatilities, said Eddie Yue
Following its 50-basis-point hike in May, the US Federal Reserve raised the Fed funds rate by 75 basis points in June to curb soaring inflation, the biggest rate hike since 1994, in addition to shrinking its balance sheet.
Financial Secretary Paul Chan Mo-po said in his blog on Sunday that further interest rate hikes in the US will inevitably affect the flow of capital and changes in asset prices in the Hong Kong market.
Chan added that the Hong Kong dollar interest rate will “gradually rise,” while the city’s public finances are robust and its risk monitoring mechanisms are appropriate and powerful for the situation.
Hong Kong’s foreign exchange reserves have more than $440 billion, or around 1.7 times the monetary base of the Hong Kong dollar — evidence of the solid financial and banking system.
According to Secretary for Financial Services and the Treasury Christopher Hui Ching-yu, whether Hong Kong follows US interest rate hikes in the future depends on financial liquidity, but the public should adopt a prudent strategy when making investment decisions.
Yue also cautioned that market uncertainties have led to wide-ranging market projections of asset prices by investment firms and analysts, which would complicate investment decision-making.
As such, the Exchange Fund will remain committed to the principle of “capital preservation first while maintaining long-term growth”, regardless of substantial market volatilities, he added.
“It should not be driven by short-term fluctuations in investment gains or losses and enticed into short-term speculation or market-chasing,” Yue said. “Such actions will heighten risk and increase trading cost, distracting us from the long-term investment objectives of the Exchange Fund.”