The Exchange Fund's total assets surged $36.1 billion to $1.05 trillion in the first half of this year, while the accumulated surplus rose $5.1 billion to $389.9 billion. Meanwhile, an investment income of $9.6 billion was recorded.

Monetary Authority Chief Executive Joseph Yam said market conditions were extremely difficult in the first half of 2004 as high oil prices and geo-political tensions gave rise to very volatile bond, equity and currency markets.

Despite market fluctuations, the Exchange Fund recorded an investment income of $9.6 billion in the period.

In his online column Viewpoint, published today, Mr Yam said the postive investment return was achieved largely in May and June when market conditions improved.

The focus: medium, long-term returns

He said: "Once again we see high volatility from month to month. Indeed, July does not look very promising. The important thing, given the objectives of the Exchange Fund, is to focus on the medium and long-term returns and not on the sharp, short-term fluctuations in the figures."

Looking ahead, he anticipated the very difficult investment environment could persist as financial markets re-adjust to a less certain interest rate outlook and the associated impact on global growth.

Foreign exchange assets rose by US$2.4 billion, from US$118.4 billion at the end of December to US$120.8 billion at the end of June. For details, click here.

Fund yields positive investment return

The Exchange Fund recorded investment income of $9.6 billion in the first half of the year. The main components were:

* a gain of $6.3 billion from bonds and other investments;

* an exchange loss of $2 billion, mainly due to movements in the euro;

* a loss of $400 million on the Hong Kong equities portfolio; and,

* a gain of $5.7 billion on other equities.

For details, click here.

Mr Yam said the exchange gains or losses did not arise from the taking of speculative foreign exchange positions.

US dollar strengthens, leads to exchange losses

He said: "The desire to achieve a better return and to manage the associated risks is best satisfied by some limited diversification into foreign currencies other than the US dollar. When the US dollar strengthens, as it did in the first half of the year, the investment strategy incurs some exchange losses."

The price of Hong Kong equities, as measured by the Hang Seng Index, fell by 2.3%. If adjusted for dividends received, the index in fact fell only 0.3%.