April 2011: European Equity Funds Lead a Broad MPF Rebound

March’s magnitude-9 Japanese earthquake and nuclear crisis briefly “shattered” global markets. But April’s earnings season brought mostly pleasant surprises, and the US Federal Reserve’s extended near-zero rates lifted every Hong Kong MPF category — equities and bonds alike. Here is the April mpf fund performance scorecard, and why developed markets are winning this year.

Which categories led in April?

European equity funds reversed March’s 1.26% loss with a 5.82% April gain — the year’s best, up 12.5% year to date. Per Lipper Hong Kong, March leader Korean equity funds took second at 5.38%; pharmaceutical and healthcare sector funds came third at 4.25%. Local favourites lagged: Hong Kong and China equity funds rose 1.85% and 0.2%, though Greater China funds managed 3.42%. Japanese equity funds recouped part of March’s 9.3% plunge with 1.19%. Target-date funds gained 3.16%; guaranteed funds’ 0.73% trailed even global bond funds’ 2.32%. The sole loser was US-dollar money funds, down 0.16%.

Why are developed markets on top this year?

Ample liquidity plus low inflation pressure makes mature markets relatively attractive. Lipper Hong Kong research head Samuel Wong credits recovering economic data, mostly better-than-expected first-quarter earnings, the Fed’s ultra-loose policy and still-negative real rates across most regions. He has shifted his recommended developed/emerging equity split from last year’s 30/70 to 50/50: emerging markets face high inflation they are ill-equipped to fight — capacity constraints, low tech levels, labour-intensive industries where wage hikes lift costs — and tighter monetary policy hurts their equities.

What risks lie ahead?

Post-earnings turnover is thinning, and the US debt ceiling is the big uncertainty. Wong warns markets are hunting for excuses to take profits, and the largest near-term threat is Congress’s wrangling over the US$14.3 trillion debt ceiling — failure to raise it soon could force partial US default, shaking sentiment badly. MPF members should stay diversified rather than going all-in on one market.

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