All market indexes, category averages, and fund performances are quoted in HKD for comparison purposes unless otherwise stated.
Market Overview
Concerns over emerging markets intensified during the past quarter. In particular, heightened uncertainties over China’s growth prospects and its equity market slump rattled global equity markets, and the MSCI World Index slid 8.45% (in US-dollar terms) in the third quarter.
Despite rampant beliefs that the U.S. Federal Reserve would start normalizing interest rates, the Fed left rates unchanged at its September meeting, as “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” This signaled the Fed’s trepidation over the impact of slower growth overseas on the domestic economy. The strong U.S. dollar (the U.S. Dollar Index, or DXY, has gained 6.74% year-to-date) also presents another potential headwind for economic recovery. U.S. equity investors seemed to have echoed these fears, and the S&P 500 was down 6.94% (in US-dollar terms) for the quarter. Nonetheless, U.S. economic activity continued to expand moderately and its unemployment rate fell to 5.1% from 5.3% during the quarter.
The eurozone continued to grow at a slow and steady pace, and the Markit Eurozone Composite Purchasing Managers Index (PMI) registered a healthy 53.6 in September. That said, this reading was still a four-month low. This could partially be attributed to slowing growth in Germany, the largest economy of the region. Perhaps more worrisome was that inflation in the eurozone slid from an encouraging 0.2% reading in June to an estimated deflationary -0.1% reading in September. This has propelled speculation that the European Central Bank (ECB) will expand its quantitative easing program, which currently entails EUR 60 billion of bond purchases each month. The MSCI Europe Index retreated by 8.86% in the third quarter when measured in euros.
China had a tumultuous quarter as the economy continued to weaken along with its stock market nosedive. The Chinese manufacturing sector contracted further; the Caixin China General Manufacturing PMI (formerly the Markit/HSBC China Manufacturing PMI) registered at 47.2 in September, which was a six-and-a-half-year low. Billed by the Chinese government as an effort to give market forces a bigger role in determining the exchange rate but generally viewed by the market as a move to raise the competitiveness of the industrials sector, the People’s Bank of China (PBOC) cut the yuan’s central parity rate against the US dollar on three consecutive days in mid-August, resulting in an approximately 3% devaluation. After peaking in mid-June, Chinese stocks plummeted as margin financing unwound. In response, the Chinese government rolled out a series of aggressive measures during the quarter to support the stock market. This included the China Securities Regulatory Commission (CSRC) relaxing margin-trading rules, cutting equity transaction fees, and banning major shareholders (those with more than a 5% stake in a listed company) and corporate executives from selling their shares for six months. In addition, the central bank cut benchmark interest rates for the fifth time since November 2014, putting the one-year lending rate at 4.60% and one-year deposit rate at 1.75% effective 26 August. The required reserve ratio (RRR) was also reduced by 50 basis points to 18% for most large banks as another attempt to revive the economy and the stock market. Despite various rescue efforts, the CSI 300 Index plunged by 30.17% in the third quarter and erased all year-to-date gains. The Hong Kong stock market exhibited similar, though arguably less pronounced, volatility. The Hang Seng Index tumbled by 19.83% and a year-to-date loss of 8.99%.
Yields fell across major bond markets in the third quarter against the backdrop of turbulent equity markets. The U.S. 10-year Treasury yield fell from 2.35% at the end of June to 2.03% at the end of September. Similarly, the 10-year German bund yield retreated from 0.76% to 0.59%, while 10-year Japanese government bond yields dropped from 0.47% to 0.36% during the quarter. As a result, the Barclays Global Aggregate Index was up 0.82%.
MPF Performance
MPFs had a brutal third quarter, and most of our MPF categories posted negative returns. Amid the turmoil in the global equity markets, investors fled to bonds, and it was no surprise that the quarter’s front-runners were mostly bond MPFs. The top-performing and only category that managed to stay afloat was HKD bond, which posted a dismal average quarterly gain of 0.49%. Within the category, My Choice HKD Bond Provident led the pack with a meagre 0.86% return. Although global bond MPFs ranked relatively well among other MPF categories, the group failed to impress with an average loss of 0.50%. Fidelity RMT-World Bond, however, outperformed all MPFs this quarter with a 1.47% gain.
U.S. equity MPFs were the best-performing equity category. That said, concerns over the impact of slower growth overseas weighed on U.S. stock performance, and the category was down 7.86% on average. Despite being 5.74% in the red, Manulife Global Select MPF North American Equity topped the category.
The Chinese stock market rout severely hurt China and Greater China equity MPFs, and they were by far the biggest losers of the quarter. The category slumped by a painful 21.45% on average, and category winner Allianz Greater China Fund – T offered investors little consolation with a 19.34% loss. Hong Kong equity MPFs were the second-worst performers with an average loss of 19.68%, in which Sun Life First State MPF Hong Kong Equity B beat its peers with a 15.20% drop.
As always, we believe investors are best served by adhering to their long-term investment plans with a well-diversified portfolio and by avoiding 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 erode an MPF’s future return potential. Different MPFs bear varying 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.
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