2014 MPF Commentary

The U.S. economy strengthened throughout 2014 and the S&P 500 index clocked a robust gain of 11.39% for the year. The Federal Reserve had stayed its course on tapering its quantitative easing program and finally concluded the bond-buying program in October. The market has now turned its attention to when the Fed would raise interest rates. The Fed’s December statement cited economic activity expanding at a moderate pace, improving labour market conditions and a lower unemployment rate. In addition, it stated that it would be “patient in beginning to normalise the stance of monetary policy”. Nevertheless, the Fed is broadly expected to raise rates sometime in 2015. Such anticipation has caused the US dollar to appreciate against all major currencies in 2014.

In contrast, other major economies were in need of reinvigoration in 2014. The threat of deflation in the eurozone loomed as inflation dropped to a mere 0.3% in November, well below the European Central Bank’s (ECB) target of just under 2%. Moreover, the Markit Eurozone Manufacturing Purchasing Manager’s Index (PMI) read 50.6 in December, tracking closely to stagnation (at the 50 level). To combat a sluggish economy, the ECB announced a program to expand its balance sheet by purchasing asset-backed securities and covered bonds in September. Although the MSCI Europe index rose a solid 6.84% in 2014 in euro terms, the currency’s 12.18% depreciation against the US dollar (to which the Hong Kong dollar is pegged) led to a poor reading of -6.18% when measured in Hong Kong dollars.

Japan also struggled in 2014. The sales tax hike to 8% from 5% in April put a dent in domestic consumer spending and the Japanese economy slid back into recession as revised third quarter GDP contracted an annualised 1.9%. This has prompted the Bank of Japan (BOJ) to ratchet up its quantitative easing program by increasing its annual purchase of Japanese government bonds to JPY80 trillion. Following this announcement on 31 October, the yen further weakened and overall depreciated against the US dollar by a whopping 12.34% in 2014. Therefore, although the Nikkei 225 index was up 7.12% for the year in yen terms, the currency’s depreciation meant it slumped by 6.10% when quoted in Hong Kong dollars. The landslide victory of Shinzo Abe’s Liberal Democratic Party in December’s election has bought time for the prime minister to continue on his pursuit of Abenomics.

Concerns over China missing its annual growth target of 7.5% persisted throughout 2014. In response, the People’s Bank of China (PBOC) has deployed a number of measures to support growth. In addition to the “targeted cut” of 0.5% in the reserve requirement ratio for banks that lend to small and rural businesses, the PBOC surprised the market on 21 November by cutting its benchmark one-year loan rate by 0.4 percentage points to 5.6% and its benchmark one-year deposit rate by 0.25 percentage points to 2.75%. Not only did that signal China’s growing worry over its economic slowdown, it was also a step towards interest rate deregulation. The fresh round of monetary stimulus fuelled the China A-shares market, which rocketed in the last quarter of 2014 and the CSI 300 index ended the year with a staggering 47.99% gain. The Shanghai-Hong Kong Stock Connect program was officially launched on 17 November, though there has been tepid demand so far. All-in-all, the Hang Seng index was up 1.27% for the year.

MPF Performance
Most of our MPF categories posted positive returns in 2014. US Equity was by far the best-performing category of the year as the U.S. stock market rallied, delivering an attractive average annual return of 9.56%. Within the category, Hang Seng MPF ValueChoice US Equity and HSBC MPF ValueChoice US Equity led the pack by rising 12.30% last year.

China and Greater China Equity MPFs, Hong Kong investors’ favourite category, were the second-best performers in 2014, up by 6.05% on average. BEA China Tracker topped the category by returning 13.73% for the year. This fund aims to match the performance of the Hang Seng China Enterprise index, which gained 15.05% in 2014. Hong Kong MPFs were 3.31% in the black for the year, with the Allianz Hong Kong Fund - B beating its peers with a 5.32% gain.

Despite the widespread expectation of an interest rate hike rise in the U.S., the 10-year Treasury yield fell. Elsewhere, quantitative easing programs in Europe and Japan also led to lower bond yields in 2014, with 10-year German bunds and Japanese government bond yields finishing the year at 0.54% and 0.33% respectively. The further compression in government bond yields globally was a key contributor to the performance of Global Bond MPFs, which gained 1.39% on average in 2014. Moreover, Hang Seng and HSBC’s Global Bond offering (available in their respective SimpleChoice, SuperTrust and ValueChoice schemes) gained an impressive 6.51% for the year.

Reversing its strong showing in 2013, Japan Equity MPFs posted an average loss of 5.27% and was the second-worst performing category of 2014. Category winner Manulife GS MPF Japan Equity delivered flat returns, with a slight 0.01% loss last year.

In the face of a stagnating economy and a weakening euro, MPFs that invest in European equities were unsurprisingly the worst performers of the year. The category posted an average annual loss of 5.63% and category winners Hang Seng MPF ValueChoice European Equity and HSBC MPF ValueChoice European Equity offered investors little consolation, with an annual loss of 3.01%.

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 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.

2014 Best Performing MPFs by Category