The Exchange Fund recorded an investment income of $106.7 billion last year, the second highest on record in terms of amount, Monetary Authority Chief Executive Norman Chan says.

The fund recorded valuation gains on and dividends from Hong Kong equities amounting to $48.9 billion and other equities amounting to $48.7 billion, an exchange valuation gain of $9.8 billion mainly due to the appreciation of other currencies against the US dollar, and a valuation loss net of interest on bonds and other investments of $700 million.

After deducting interest and other expenses, net investment income in 2009 was $103.2 billion. Taking into account fee payments to the Fiscal Reserves and placements by Hong Kong Government funds and statutory bodies of $34.7 billion, and adding back the valuation gain and dividend income on the Strategic Portfolio of $4.3 billion, the Accumulated Surplus recorded an increase of $72.8 billion.

The Abridged Balance Sheet shows the fund's total assets rose to $2.1517 trillion at the end of 2009, a growth of $591.4 billion compared with the end of 2008. The increase is mainly attributable to capital inflows into the Hong Kong dollar.

Excluding the Strategic Portfolio performance, the fund's investment return was 5.9% last year. The average return was 3.8% over the last three years, 4.8% over the last five years, 5% over the last 10 years and 6.1% since 1994. These returns compare favourably with the average inflation rate during the corresponding period.

While major financial markets recovered from the market turbulence in 2007 and 2008, Mr Chan said the investment environment last year remained extremely uncertain and volatile.

"Major equity markets were still under pressure in the first quarter, but started to recover from the turbulence created by the financial crisis from the second quarter because of the positive impact of stimulus packages and greater investor optimism. US bond yields, on the other hand, saw a sharp rise during the year, especially at the long end, with concerns over the supply of US government bonds and uncertainties about the timing and pace of the exit from monetary easing," he said.

The prospects for the global financial markets are uncertain as the sustainability of the modest recovery in the global economy remains to be seen, he said. Global banks are expected to face increasing pressure to meet capital and other financing needs in the coming two to three years. The financial markets' performance is clouded by the considerable uncertainty about the timing of the exit from monetary easing.

"I expect the uncertainties surrounding the movements of interest rates, international fund flows and exchange rates may lead to considerable volatility in global asset markets in 2010," he said, adding it is extremely difficult to forecast the fund's performance this year but the authority will continue to be vigilant and manage the fund prudently.