Hong Kong Exchange Fund Reports $25.8 Billion Losses on -4.4% Returns in 2022 & Annualised 13% Returns Since Inception in 2009, Total Assets at $511 Billion
2nd February 2023 | Hong Kong
Hong Kong central bank Hong Kong Monetary Authority (HKMA) has released the Hong Kong Exchange Fund 2022 performance, reporting $25.8 billion losses on -4.4% returns in 2022 & annualised 13% returns since inception in 2009, and reporting total assets of $511 billion in 2022. Eddie Yue, Chief Executive of the HKMA: “Financial markets experienced an exceptionally volatile year. The Russia-Ukraine conflict at the beginning of the year sent energy and commodity prices significantly higher, while the ongoing pandemic situation further disrupted global supply chains and caused inflation to soar in major economies, prompting major central banks to tighten their monetary policies aggressively. Successive sharp interest rate hikes for a total of 425 basis points by the US Federal Reserve within the year have led to massive sell-offs in the global bond and equity markets, which registered a notable fall of 16.2% and 19.8% respectively for the year. This investment environment not only undermined the conventional complementary effects of bonds and equities, but has also marked 2022 as the only year in almost half a century during which returns from equities, bonds and major currencies against the US dollar all recorded negative returns simultaneously. See below for Hong Kong Exchange Fund performance and full statement by Eddie Yue, Chief Executive of the HKMA.
“ Hong Kong Exchange Fund Reports $25.8 Billion Losses on -4.4% Returns in 2022 & Annualised 13% Returns Since Inception in 2009, Total Assets at $511 Billion “
Eddie Yue, Chief Executive of the HKMA:
Eddie Yue, Chief Executive of the HKMA: “Financial markets experienced an exceptionally volatile year. The Russia-Ukraine conflict at the beginning of the year sent energy and commodity prices significantly higher, while the ongoing pandemic situation further disrupted global supply chains and caused inflation to soar in major economies, prompting major central banks to tighten their monetary policies aggressively. Successive sharp interest rate hikes for a total of 425 basis points by the US Federal Reserve within the year have led to massive sell-offs in the global bond and equity markets, which registered a notable fall of 16.2% and 19.8% respectively for the year. This investment environment not only undermined the conventional complementary effects of bonds and equities, but has also marked 2022 as the only year in almost half a century during which returns from equities, bonds and major currencies against the US dollar all recorded negative returns simultaneously.
Amid this harsh investment environment last year, many investment funds posted unfavourable results and registered losses of varying degrees. While the Exchange Fund could not stay unscathed, the investment loss sustained by the Exchange Fund was relatively smaller as compared to the performance of major market indices and mixed-asset funds. This shows that our diversified long-term asset allocation as well as the defensive measures and strategic adjustments in response to changes in the external environment have been effective in mitigating the destructive impact of market storms.
Looking ahead in 2023, financial markets will continue to face significant uncertainties and asset prices are expected to remain volatile. The monetary policies of major central banks will continue to dominate the investment outlook, and financial markets will pay close attention to peak policy rates set by major central banks. The path of inflation is key to all these developments. Although there were signs indicating inflation may have peaked towards the end of 2022, it is still well above the targets set by major central banks. Recent minutes of the Federal Open Market Committee meetings also pointed out that containing inflation remains the policy focus, and it is anticipated that ongoing increases in the target range for the federal funds rate would be appropriate. With uncertainties surrounding the paths of inflation and interest rates, asset prices will inevitably experience sharp swings or adjustments in the event that the actual situation deviates substantially from market expectations.
Moreover, the continued tightening of monetary policy has posed headwinds to global economic growth. Many institutions have lowered their global economic growth forecasts for this year, and certain major economies may even slide into recession. In addition, the potentially destructive forces of unresolved geopolitical tensions, such as the energy crisis caused by the Russian-Ukraine conflict and trade relationships among major economies, may further impact global economic growth and heighten risk-off sentiments in the market.
Nevertheless, on a more positive note, with the relaxation of COVID-prevention measures and the introduction of economic stimulus measures in Mainland China, the Mainland economy may rebound strongly this year. At the same time, amid market expectation of slowing inflation and therefore more gradual rate hikes, bond investments have become more appealing. With yields of major Government bonds currently at multi-year high levels, investing in bonds would give investors a higher interest income.
Despite the complicated and challenging investment environment, the Exchange Fund will remain committed to the principle of capital preservation first while maintaining long-term growth. The HKMA will continue to manage the Exchange Fund prudently. We will remain flexible, implement defensive measures as appropriate, and maintain a high degree of liquidity. We will continue to diversify investments to strive for higher long-term returns for the Exchange Fund. We will also monitor market developments closely to ensure that the Exchange Fund will continue to serve its purpose of maintaining monetary and financial stability in Hong Kong in an effective manner.
Hong Kong Exchange Fund Performance 2022
The Exchange Fund recorded an investment loss of HK$202.4 billion in 2022. The main components were:
- losses on Hong Kong equities of HK$19.5 billion;
- losses on other equities of HK$61.2 billion;
- losses on bonds of HK$53.3 billion;
- negative currency translation effect of HK$40.1 billion on non-Hong Kong dollar assets (Note 1); and
- losses on other investments of HK$28.3 billion (Note 2).
Fees on placements by the Fiscal Reserves and placements by HKSAR Government funds and statutory bodies were HK$35.0 billion (Note 3) and HK$22.1 billion respectively in 2022, with the rate of fee payment at 5.6% for 2022.
The Abridged Balance Sheet shows that the total assets of the Exchange Fund decreased by HK$559.1 billion, from HK$4,570.2 billion at the end of 2021 to HK$4,011.1 billion at the end of 2022. Accumulated surplus stood at HK$555.5 billion at end-December 2022.
The Exchange Fund recorded a negative investment return of 4.4% in 2022 (Note 4). Specifically, the Investment Portfolio recorded a negative rate of return of 8.6% and the Backing Portfolio a negative rate of return of 0.4%. The Long-Term Growth Portfolio (LTGP) recorded an annualised internal rate of return of 13.0% since its inception in 2009 up to the end of September 2022.
The Hong Kong Monetary Authority (HKMA) is Hong Kong’s central banking institution. It was established on 1 April 1993 by merging the Office of the Exchange Fund and the Office of the Commissioner of Banking. The HKMA’s four main functions are:
- maintaining currency stability within the framework of the Linked Exchange Rate System;
- promoting the stability and integrity of the financial system, including the banking system;
- helping to maintain Hong Kong’s status as an international financial centre, including the maintenance and development of Hong Kong’s financial infrastructure; and
- managing the Exchange Fund.
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