The Hong Kong Monetary Authority (HKMA) reported on 28 July that the city's Exchange Fund—the de facto sovereign wealth reserve that underpins the Hong Kong dollar's stability—earned HK$134.7 billion in investment income for the first six months of 2026. That represents a 37% drop from the HK$214 billion recorded in the same period a year earlier, yet the headline figure masks a dramatic quarterly turnaround: the second quarter alone contributed HK$90.8 billion, a 107% surge from the first quarter's lacklustre HK$43.9 billion.
The sharp divergence between the two quarters reflects the volatile global market environment that has defined 2026 so far. According to HKMA Chief Executive Eddie Yue, the first quarter was rattled by geopolitical tensions in the Middle East, which triggered significant volatility in March. As the situation stabilised, however, investor sentiment clearly improved in the second quarter, allowing global financial markets to post broadly positive returns over the half‑year. Yue noted that artificial‑intelligence‑related investment demand, particularly in semiconductors and tech hardware, propelled US stocks and several major Asia‑Pacific indices to new highs, while bond markets remained under pressure from lingering inflation concerns.
A tale of two portfolios
The underlying performance across asset classes could hardly be more uneven. The bond portfolio, which has traditionally been the fund's steady anchor, generated HK$49.1 billion in income—down 35% from HK$75.3 billion in the first half of 2025. The decline came as US Treasury yields shifted upward amid fears that earlier spikes in international oil prices and supply‑chain disruptions might re‑ignite inflation. Higher yields depress bond prices, yet they also offer higher coupon income; the net effect was a still‑positive but markedly reduced contribution.
Hong Kong equities proved the biggest drag. The local stock portfolio swung to a loss of HK$11.8 billion, compared with a HK$22.9 billion gain in the first half of 2025. The Hang Seng Index fell roughly 11% over the period, weighed down by rising interest‑rate anxieties and persistent concerns over the city's property and consumption recovery. Yue acknowledged the disappointment but stressed that the overall equity book remained healthy because of the stellar performance of other markets.
That "other equity" category—essentially overseas stocks—was the true star of the half‑year. Gains here nearly doubled to HK$53.7 billion, up from HK$27.4 billion a year earlier, driven overwhelmingly by US tech giants and Asian semiconductor leaders. This surge not only offset the Hong Kong losses but also delivered a handsome net positive return for the entire equity portfolio. In addition, non‑Hong‑Kong‑dollar assets benefited from foreign‑exchange revaluations, adding HK$34.3 billion, though that was down from HK$56.8 billion in the prior year's first half.
Second‑quarter rebound: a 107% quarter‑on‑quarter leap
The second‑quarter numbers tell a more reassuring story. Investment income hit HK$90.8 billion, propelled by a HK$64.7 billion windfall from overseas equities—more than double the HK$27.5 billion in the same quarter of 2025. Bond income recovered to HK$24.5 billion, while the Hong Kong equity loss narrowed to HK$6.8 billion. The sharp improvement confirms Yue's earlier assessment that the market turbulence in March was temporary and that global risk appetite had returned by mid‑year.
Shanghai Commercial Bank's head of research, Ryan Lam, observed that the Hong Kong stock market has recently staged a decent rally, suggesting that the second‑half equity return from the local portfolio may be relatively steady. However, he cautioned that bond markets could face renewed volatility as the Federal Reserve's policy path remains data‑dependent, and he expects the Exchange Fund's overall investment performance to become more erratic in the coming months.
Risks ahead: AI valuations, Fed policy, and geopolitics
Looking forward, Yue painted a cautious picture. He identified three major sources of uncertainty. First, asset prices linked to artificial intelligence have already risen substantially, and some market participants are beginning to question whether a sharp correction in these stocks could spill over into broader markets. Second, the Federal Reserve has recently reduced its forward guidance, making markets more sensitive to each new inflation and employment report, which could amplify daily price swings. Third, geopolitical flashpoints—particularly in the Middle East and Eastern Europe—remain unpredictable; any renewed disruption to energy supplies or global supply chains would reignite inflationary pressures and complicate central‑bank decisions.
Yue reiterated that the HKMA will continue to adhere to its long‑standing principle of "capital preservation first, long‑term growth next". In practice, this means maintaining high liquidity, making defensive pre‑positioning adjustments, and diversifying the portfolio across geographies and asset classes. The fund's total assets stood at HK$4,463.6 billion at the end of June, up HK$302.4 billion from end‑2025, while its accumulated surplus reached HK$862.7 billion.
A steady hand in turbulent times
The Exchange Fund, established in 1935, has weathered numerous financial storms—from the Asian financial crisis to the global pandemic. Its primary mandate is not to maximise returns but to safeguard Hong Kong's monetary and financial stability. That is why even in a year of strong equity gains, the HKMA remains cautious about over‑exposure to volatile assets. The fund's placement rate for fiscal reserves and government funds was set at 4.8% for 2026, with related expenses of HK$10.9 billion and HK$5.8 billion respectively in the first half.
As global markets enter the second half, the fund's managers are acutely aware that the same AI enthusiasm that boosted overseas returns could also trigger a sudden reversal. Whether the Exchange Fund can maintain its defensive edge while capturing growth opportunities will depend on how skilfully it navigates the interplay between inflation, interest rates, and geopolitical risks. For now, the HK$134.7 billion half‑year result—though down year‑on‑year—demonstrates that prudent diversification and timely rebalancing can still deliver resilient outcomes, even in a world of elevated uncertainty.
Related News:
Deepline | HK exports post fastest growth in 42 years, US-bound shipments surge record 114.3%
Comment