All market indices, category averages and fund performance are quoted in HKD for comparison purposes.
Market Overview
The global economy had an eventful second quarter. Here, we take a look at the major macro-economic events of the past quarter and how they affected the performance of MPFs.
The US equity market continued to hit new highs, with the S&P 500 index clocking a robust gain of 4.60% in the second quarter. Although severe weather conditions led to an economic contraction in the first quarter and Federal Reserve officials have subsequently lowered their growth forecast to a range of 2.1-2.3%, the jobs market and the manufacturing sector have continued to improve. With economic activity expanding at a moderate pace and the unemployment rate expected to fall quicker than previously forecasted, the Fed stayed its course on tapering its quantitative easing program by US$10 billion a month and so far has reduced its asset purchases to US$35 billion from US$85 billion per month, beginning July.
Euro-area inflation dropped to a mere 0.5% this quarter, well under the European Central Bank’s (ECB) target of just below 2%. In the face of a deflation threat, the ECB rolled out a series of measures to stimulate the economy. These included cutting the main lending rate by 10bps to a record low of 0.15% to lower borrowing costs and imposing a first-ever negative interest rate of 0.1% on bank deposits to encourage banks to lend more money. The market responded well to the news and the MSCI Europe index was up 3.22% for the quarter.
Concerns over China’s economic slowdown persisted. The country registered a GDP growth of 7.4% in the first quarter of 2014, which was slightly below the government’s full-year target of 7.5%. As a measure to support growth, the People’s Bank of China cut the reserve requirement ratio by 0.5% for banks that lend to small and rural businesses and later extended the cut to certain national banks such as China Merchants Bank and Industrial Bank. This “targeted cut” aims to help selected sectors while avoiding aggressive stimulus such as in 2009. On the other hand, manufacturing data showed improvement this quarter. The HSBC/Markit Purchasing Managers’ Index rose to 50.7 in June from a “contracting” reading of 48.1 in April, marking a seven-month high. However, this did little to reinvigorate the stock market and the CSI 300 index returned a meagre 1.00% this quarter, while sliding by 9.38% year-to-date. This poor performance is partially attributable to the RMB’s weakness, which has depreciated against the Hong Kong dollar (which is pegged to the US dollar) by 2.48% in the first half of 2014.
Japan raised its sales tax for the first time in 17 years, hiking the rate to 8% from 5% in April. The results of the quarterly Tankan survey, which polls more than 10,000 Japanese companies about their outlook, showed a steep decline in business confidence after the consumption tax increase. On the bright side, it also showed a 7.4% forecast increase in large companies’ capital spending, up from 0.1% in March. All in all, the Nikkei 225 index recorded a 3.86% gain in the second quarter. However, this was insufficient to cover for the loss made earlier this year and the index was down 3.48% year-to-date.
MPF Performance
The second quarter was a good one for MPF investors, with all of our 19 MPF categories posting positive returns. For a more meaningful comparison between equity MPFs that predominately invest in Asia, we recently replaced our “Asia Equity” category with “Asia ex-Japan Equity” and “Asia-Pacific ex-Japan Equity” categories. Coincidentally, the best performing category this quarter was Asia ex-Japan Equity, having returned 6.54% on average. Within the category, Allianz Asian Fund – A topped its peers by returning 8.80% for the quarter.
MPFs that invest in Japan were the second-best performers this quarter, with the category rising by 5.53%. However, this was not enough to recover from the hefty loss in Q1 and the category was still down by 3.07% year-to-date. Manulife GS MPF Japan Equity was the top performer within this small category, delivering a strong quarterly return of 7.65%.
Despite the decelerating Chinese economy, China and Greater China Equity MPFs were among the front runners this quarter, averaging a 5.52% gain. The pack leader, and in fact the winner out of the entire MPF universe, was BEA Greater China Tracker. The fund aims to replicate the FTSE Greater China HKD index’s performance, which has returned 6.62% for the quarter. However, unlike a typical tracker fund, the BEA Greater China Tracker’s return exceeded the benchmark with an 11.03% gain. Hong Kong Equity MPFs were 4.84% in the black for the quarter, with the Hang Seng and HSBC Hang Seng Index Tracking Fund (available on their SuperTrust, SuperTrust Plus and ValueChoice schemes) beating its peers with a 6.60% gain.
Despite being one of the worst performing categories this quarter, Europe Equity MPFs still managed to stay afloat by gaining 1.09% on average. Category winner BOC-Pru Easy Choice European Index Tracker was up 2.71% in Q2.
As always, we believe investors are best served by adhering to their long-term investment plans with a well-diversified portfolio and avoid being swayed by short-term changes in the macroeconomic environment. Furthermore, investors should not rely on simple performance data when making investment decisions. A key factor to consider is fees, as high fees will certainly erode an MPF’s future returns potential. Different MPFs bear different degrees of risk; for example, equity funds are generally riskier than bond funds and investors should select their MPFs according to their own risk appetite and tolerance.
Q2 2014 Best Performing MPFs by Category
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To review the full Q2 2014 MPF Performance Report, please click here.
