Hong Kong Pension Warns Coronavirus Will Hurt 2020 Returns

The HK$969.5 billion ($124.6 billion) Hong Kong Mandatory Provident Fund (MPF) has warned that the damage the coronavirus outbreak has caused to global markets will hurt its returns in 2020, as Hong Kong’s investment markets are “inevitably influenced by the global economy and international fund flow.”

The warning came as the fund’s leaders reported its 2019 returns, which they did via video conference, and while wearing masks, as a precaution to reduce the risk of spreading the virus, which has caused a disease known as COVID-19.

“We have very challenging investment markets worldwide this year. The COVID-19 outbreak has affected the investment market worldwide,” said Cheng Yan-chee, executive director of the Mandatory Provident Fund Schemes Authority (MPFA), according to the South China Morning Post. “On Monday [Feb. 24] alone, the US benchmark Dow Jones Industrial Average dropped over 1,000 points and there will be more volatility ahead.”

Despite the hammering the global markets have taken as the coronavirus has spread beyond China, Andy Rothman, an investment strategist at Matthews Asia, and an expert on the Chinese economy, said there are some “promising trends” that may indicate there’s a light at the end of the tunnel.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“I think it is significant that 97% of global cases of COVID-19 are still within mainland China, despite the virus having been around since at least December,” Rothman wrote in a Q&A to investors. He said that although the Hubei province of China remains a public health disaster, “the virus seems to be coming under control in the rest of China.”

He also said that in order to get a sense of how the Chinese economy might respond to the coronavirus, he reviewed how the SARS outbreak of 2002-2003 affected the economy back then. He noted that, as a result of SARS, the annual growth rate of nominal retail sales slowed in the first quarter of 2003 to 4.3% in May of that year, but rebounded to 9.9% that August, and that for full-year 2003, nominal retail sales rose 9.1% compared with 8.8% in 2002.

Additionally, while China’s growth domestic product (GDP) growth slowed to 9.1% in the second quarter of 2003 from 11.1% in the first quarter, it bounced back to 10% in the third quarter. And for the full year 2003, GDP rose by 10%, compared with 9.1% in 2002.

“Our main conclusion is that after a sharp, short-term negative impact, the Chinese economy rebounded quickly,” he said. And while pointing out that past performance is no guarantee of future results, “this historical data does give me confidence that if COVID-19 is largely brought under control in March, then economic activity can return to normal in China (excluding Hubei) before the damage becomes severe.”

However, he also cautioned that knowledge of this new disease is incomplete and changing daily and cited three main risks to the apparent trend that the virus is coming under control in China. The first is the risk of a new spike in coronavirus cases in China as people begin to venture out in public more. The second is that the recent acceleration in new cases reported outside of China leads to far more cases in Iran, South Korea, and Italy, which he said could lead to COVID-19 appearing in many more countries.

And the third risk concerns cases of individuals transmitting the virus before showing any symptoms. He said scientists and public health officials are still trying to determine whether this is common or rare, and said that if this is more common than thought, then it will be much more difficult to control the disease. Rothman said that if any of the three risks come to pass, the economic impact inside and outside of China would be greater.

The MPF reported that its portfolio returned 12.2% net of fees and charges in 2019, and that, as of December, the system has generated an annualized return of 4.1% since its inception in December 2000. The returns raised the fund’s total asset value to HK$969.5 billion.