As of the end of 2016, total assets of the Macao SAR Fiscal Reserve stood at MOP438.7 billion approximately, comprising MOP132.8 billion of Basic Reserve and MOP305.9 billion of Excess Reserve. Under an effective and prudent investment strategy, the Fiscal Reserve recorded a total investment income of MOP3.31 billion for 2016. The income represented an annual return of 0.8% in 2016, a slight increase compare to the 0.7% of 2015. The size of the Fiscal Reserve, nevertheless, grew 27% over the year.
In 2016, asset allocation of the Fiscal Reserve included global bonds of high credit quality (with low default risk), equities of medium and large scale enterprises (with relatively small business operation risk) and money market instruments from institutions with high liquidity and creditworthiness (with low deposit default risk). Currency exposure of the Fiscal Reserve included major currencies such as the USD, HKD and Chinese Yuan. In order to provide more details on the Fiscal Reserve’s activities in each of the different asset markets, the following summary has been prepared:
- Fixed income market – the global bond market experienced a period of sharp reversal in yield towards the second half of 2016 and bond prices moved lower rapidly. However, the Fiscal Reserve’s appropriate risk control measures and dynamics in asset allocation helped the portfolio weather this challenging period. Investment income from bonds continued to be the largest income source for the Fiscal Reserve in 2016 and amounted to MOP3.16 billion.
- Equity market – volatility in equity markets during 2016 was unconventional. Global developed markets, global emerging markets and the mainland China A share market demonstrated diverged reaction towards global and regional events. With a well-balanced allocation to these 3 major sectors, the Fiscal Reserve’s portfolio successfully minimized the overall volatility of returns due to any single market’s short term vulnerability. Equity investments incurred an investment loss of MOP0.5 billion for 2016.
- Foreign Exchange market – the global currency market displayed volatile movements in 2016. In particular, the BREXIT event in June and an unexpected election result in the US Presidential race in November brought huge moves to the foreign exchange market. Towards the end of the year, the USD index reached a new high since 2014 and most of the other major currencies remained weak versus the US dollar. The Sterling Pound dropped 16% versus the US dollar, representing the sharpest annual move in 8 years. The Chinese Yuan also traded to an 8-year low against the greenback, dropping 7% in value. Amidst this volatility, the Fiscal Reserve dynamically adjusted its currency exposure mix to minimize revaluation losses. However, due to a weaker year-end level of some major currencies (specifically the Chinese Yuan’s accumulated depreciation), the Fiscal Reserve still suffered a currency revaluation loss of MOP2.07 billion approximately.
- Money market – strategic asset allocation of the Fiscal Reserve, coupled with market interest rate levels, determined the placement activities in short term money market instruments. Overall, during the year 2016, money market placements provided an income of MOP2.73 billion for the Fiscal Reserve.
For the year 2016, the annual investment income for Fiscal Reserve totalled MOP3.31 billion, equivalent to an annual return of 0.8%. In reviewing the performance track records for the past 5 years, since its inception in 2012, the Fiscal Reserve has been managed under an effective and prudent strategy for its investments and achieved positive return for the past five years despite varying market volatility. The Foreign Exchange Reserve, which has also been pursuing a sturdy investment strategy, provided positive return in each of the fiscal years since the return of Macao to the Motherland in 1999 too.
Looking forward into 2017, the US Federal Reserve is widely expected to hike its benchmark official rate in a gradual manner. Major economies around the world have come to an important crossroad with their quantitative easing measures coming to an end. Supportive factors such as huge liquidity for financial markets and historically low interest rate are now receding. Global bond markets could be expected to go through difficult times. In response to these expectations, the Fiscal Reserve would seize market opportunities to divert more resources into equity markets for a more diversified asset mix. Apart from gradually accumulating equities at a relatively attractive level and locking in a better return potential, the Fiscal Reserve would also look into opportunities for investment cooperation on various projects through the related platforms, including Silk Road Fund, China-LAC Industrial Cooperation Investment Fund Co. Ltd. and China-Africa Fund for Industrial Cooperation Co. Ltd. All of these are aimed to achieve a better diversification benefit from a global portfolio, while minimizing risks assumed. The Monetary Authority of Macao would continue to pursue a prudent, effective and sturdy strategy with its investment for the Fiscal Reserve and ensure strict observation of its legal requirements and policy goals. With a constant evaluation of risk and reward, the Fiscal Reserve targets at a well-diversified portfolio mix, for capital preservation and asset growth, in the long run.