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Nelson, honourable guests, ladies and gentlemen, good morning. It’s my pleasure to speak to you today at the annual conference of the Hong Kong Investment Funds Association (HKIFA). The theme of this conference is “Re” – it’s probably the shortest theme ever, and I like it. With this in mind, I title this speech “Reflect, Reset and Refocus – Game Plan for Hong Kong as an Asset Management Hub”.

Reflections on market challenges in 2022

Let‘s start with Reflections. The investing landscape saw a tectonic shift in 2022 and asset managers now operate in a profoundly different environment from the past two decades. The abrupt end to zero interest rates and quantitative easing shook the markets, and this was compounded by the lingering impact of the pandemic. In many developed economies, interest rates soared to tame the inflation spurred by commodity prices and supply bottlenecks. Add to these a war in Europe, lockdowns in China and continuing geopolitical tensions.

Through most of 2022, market players found themselves in uncharted territory. Both equities and fixed income were hit hard, sending valuations lower for most public fund portfolios. Equities saw the worst year since 2008, losing 20% in value. Bond indices also recorded double-digit losses. A typical investor long in both would have lost money, regardless of allocation. Our Mandatory Provident Fund painted a similar picture, as the net asset value (NAV) of constituent funds fell more than 10% in 2022, according to the data from the MPF Schemes Authority.

A Reset

Despite this perfect storm, Hong Kong has shown resilience and seemed to have turned the corner late last year. Let me share with you a few encouraging signs for the asset management industry from the first quarter of 2023.

Firstly, for our sample of more than 400 licensed corporations with Type 9 licence, asset management income for the first quarter was flat year-on-year – a clear improvement from double-digit declines through all quarters of 2022. Secondly, the NAV of Hong Kongdomiciled funds has resumed growth since plumbing lows in the third quarter last year. NAV has rebounded for two straight quarters to US$175 billion. Also, our fund flow data show net inflows into Hong Kong-domiciled funds for two straight quarters, totalling US$7.5 billion1 , after a mild outflow in the third quarter of 2022. This is an important gauge of investor sentiment. Thirdly, based on the HKIFA’s data, retail fund sales to Hong Kong investors have put an end to five quarters of net redemption to return to positive territory.

It was as if the Reset button was pressed for Hong Kong at the beginning of 2023 when the city’s last COVID restrictions were shed and the Mainland reopened its borders. Money market funds, short duration bonds, balanced funds and mandates from insurance companies all saw strong inflows, especially for those financial institutions with large retail networks.

But the investing terrain is still rough. Performance varies because it depends on the resilience of one’s business strategies and portfolios against rate hikes and other headwinds. Asset managers have to navigate a real economy where high rates constrain credit expansion. The landscape only gets more complicated with US debt ceiling and regional bank concerns and tensions between the largest economies. However, we must not lose sight of the many opportunities driving innovation and sustainable investments. These include digitalisation, Web3 and generative AI, in addition to China’s reopening.

Back when the cost of money was zero or near zero, a rising tide lifted all boats without calling for an active strategy, and you score regardless. When you are up against strong headwinds, as you were last year, playing defence is the only strategy. So far this year, the market is still fraught with uncertainty but it is showing good value at the same time. So there is a clear need to Refocus strategies to balance defence and offence. Moreover, with US Fed funds rate hovering above 5%, a clear strategy is essential to navigate the complex landscape, steer clear of the risks and harness emerging opportunities.

Strategy Refocused:

growth in a complex landscape Now the SFC, as a financial regulator, also needs a very clear strategy to navigate this landscape and bring Hong Kong to the next level as an international asset management hub and private wealth centre. Our strategy comprises four prongs, namely 1) onshoring, 2) platforms, 3) products and 4) technology and services.

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