Hong Kong's mutual fund market saw a remarkable recovery in the first quarter of this year, bouncing back from the worst net outflow ever recorded in the previous year. The improved market sentiment, coupled with a more stable interest rate environment, contributed to a surge in retail fund sales in Hong Kong.
Data provided by the Hong Kong Investment Funds Association (HKIFA), the industry body representing local units of international fund houses, revealed that retail fund sales in the first three months of the year exceeded investor redemptions, resulting in a net capital inflow of US$15.51 billion.
Nelson Chow, Chairman of the HKIFA and Managing Director of AllianceBernstein's Hong Kong unit, expressed optimism about the mutual fund market's significant improvement in 2023. He noted, "The mutual fund market in Hong Kong has improved significantly this year as new sales of funds have started to surpass redemptions."
This positive trend marked the end of five consecutive quarters of net outflows, which began in the fourth quarter of 2021 with outflows amounting to US$575 million. Throughout 2022, total outflows reached US$7.74 billion, the highest since the HKIFA started publishing data in 1999. However, there was a notable turnaround in 2021 when Hong Kong's mutual funds experienced a net inflow of US$8.8 billion, reversing the previous year's outflow of US$5.65 billion.
Chow attributed the redemptions in the previous year to the significant rise in interest rates. Over a 15-month period, key rates in Hong Kong and the US increased by 5 percentage points, prompting investors to shift their funds towards time deposits rather than the stock market. Hong Kong commercial banks now offer interest rates of 3 to 4 percent for time deposits, a considerable increase from the almost negligible rates before the rate rise cycle began in March of the previous year.
In terms of fund preferences, the data from HKIFA showed that funds investing in bonds, excluding high-yield bonds, accounted for 36.5% of total retail fund sales in Hong Kong during the first quarter. Mixed-asset funds investing in both stocks and bonds followed closely with a 30% market share, while stock funds claimed 21% of the market.
The benchmark Hang Seng Index, after experiencing three consecutive years of decline during the pandemic, recorded a 3.1% increase in the first quarter. It had declined by 15% in the previous year, following a 14% fall in 2021 and a 3.4% dip in the year before that.
Chow cautiously expressed optimism about the future, citing the increasing attractiveness of the bond markets and the growing stability of the stock market. He also highlighted the temporary pause in interest rate hikes and the reopening of the border between Hong Kong and mainland China in January 2023, which have helped restore normal business activities.
Despite the challenging environment, Hong Kong's asset management companies managed to maintain their income levels in the first quarter compared to the same period the previous year. Julia Leung Fung-yee, CEO of the Securities and Futures Commission (SFC), stated during an HKIFA forum in June that the 400 licensed asset management companies in Hong Kong successfully avoided the double-digit declines seen in all quarters of 2022. Leung commended Hong Kong's resilience, mentioning that the city seemed to have turned the corner late last year.
According to the SFC, the net asset value of Hong Kong domiciled funds experienced substantial growth of US$7.5 billion in the six months leading up to the end of March, bringing the total to US$175 billion. This growth indicates a positive trajectory for the mutual fund industry in Hong Kong.
By fLEXI tEAM