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How does the surge in global interest rates affect Hong Kong MPF investment returns?

By Elaine Hwang | August 29, 2022

Faced with inflation that keeps soaring to new levels, central banks in many countries are responding by raising interest rates.

To what extent will MPF investments be affected by higher interest rates, and what actions should members take in response?

Economic recession and stagflation

When central banks raise bank interest rates, money becomes more expensive to borrow, which increases the borrowing cost to investors. This slows the growth rate of the economy overall, while also curbing inflation. The U.S. Federal Reserve, one of the most powerful central banks, increased interest rates by 75 basis points at its June and July meeting, the largest increase in the past decade.

Over the past ten years, we have all become accustomed to the low-interest rate environment. People are now starting to feel uneasy about the prospect of increasing interest rates, and are also concerned by the fall in investment markets. The biggest worry for investors now is that further expected increases will lead to a recession or even stagflation.

Both stocks and bonds have fallen in value

Under current market conditions, different asset classes are affected in different ways and to a different extent. Companies' revenue and earnings have been relatively gloomy due to slowing economic activity, leading to a downward trend in stock values, especially high-growth technology stocks.

In addition, lower-risk assets such as bonds have also been falling in price due to higher interest rates. Although the Fed only sets short-term interest rates, there is a knock-on effect on medium and long-term interest rates. When interest rates rise, bond prices typically fall as will the market value of bond portfolios.

Historical ups and downs in the economic cycle

When investment markets are volatile, decision-making can be difficult. However, it can be seen from historical market downturns, that investment markets often recover faster than expected.

Over the 20 or so years since the MPF was launched, there have been several market corrections including the global financial crisis in 2008, and asset prices have subsequently returned to their long-term trend. According to the MPFA's annual report, for the period from 1 April 2008 to 31 March 2009, MPF assets dropped by 25.9%, with a total loss of HK$69 billion. During the following year, MPF asset returns rebounded sharply, with a net investment return (excluding contributions) of HK$70 billion, a rate of return of 30.1%.

Similar examples can be seen in 2003-2004, 2012-2013, and 2020-2021. It should be noted that past market performance is not an indication of future returns, but it can be considered a useful reference.

When asset prices are low, members can buy more fund units with the same contribution amount and lower the average buying price. When market conditions recover, the rebound in returns will also be reflected in members' MPF balances.

Price volatility is inevitable for MPF assets

Market volatility may be of concern to anxious investors whose focus is on the short-term. However, for longer-term investors who invest for retirement in the MPF, market fluctuations along the way are inevitable. MPF contributors should make decisions based on their long-term risk tolerance level and should adopt a forward-looking retirement-focused mindset. Further, it should be noted that the MPF system allows retired members to continue to invest their accumulated benefits after retirement, which provides flexibility for members approaching retirement to wait until market conditions improve before withdrawing their benefits.

This article in English and Chinese is available for download.


Senior Director & Business Development Lead, Greater China

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