Not Yet Time to Buy the Dip: MPF Fund Performance in September 2011

In the week ended 16 September 2011, Hong Kong MPF funds fell 0.07% on average: equity funds dropped 0.16% and bond funds 0.03%, with only mixed-asset funds posting a 0.14% gain. Against a worsening European debt crisis and a market sell-off that followed the US Federal Reserve’s “Operation Twist” announcement, MPF fund performance came under renewed pressure — Lipper’s analysis concluded it was not yet time to buy back into equities, and MPF members’ first priority should be preserving the value of their assets.

Why Is Now Not the Time to Buy the Dip?

Equities look cheap on valuation, but earnings forecasts keep being cut, so it is not yet time to buy back into equities: the Hang Seng Index and the Hang Seng China Enterprises Index trade at 32.9% and 43.0% discounts to their historical average 2012 forecast price-earnings ratios, yet their 2012 earnings-growth forecasts have been cut by 28.8% and 17.5% respectively since 1 August 2011, with Shanghai A-share and S&P 500 forecasts cut in the same period. This matters most for members holding preserved accounts — the balances are large and switching carries weight, so adding risk before the trend turns is unwise.

Why Did the Fed’s “Operation Twist” Fail to Lift Markets?

On 21 September 2011, the US Federal Reserve announced “Operation Twist”: selling US$400 billion of short-term Treasuries with remaining maturities of 3 years or less by June 2012, while buying an equal amount of 6- to 30-year bonds to extend the maturity of its holdings and stimulate recovery. But markets had widely anticipated the plan, so there was no surprise; and with the Fed warning the US faced significant downside economic risks, the Dow and the S&P 500 fell 2.49% and 2.94% that day, triggering a fresh round of selling. Four years had shown that monetary stimulus alone could neither resolve Europe’s sovereign debt crisis nor reignite global growth — prudent fiscal policy and cooperation among policymakers were also needed, and neither was in evidence, making the global investment outlook more challenging.

Preserved-Account Holders Should Prioritise Capital Preservation

Only when the European debt crisis and global growth strategies turn will confidence return: consumers spending more, employers hiring with assurance. In the meantime, investors’ first goal should be preserving the value of their assets. To compare how different fund types have fared through the turbulence, see MPF fund comparison.

Author: Wong Chak Ming (Director of Research, Lipper Hong Kong)