HONG KONG, April 27 (Reuters Breakingviews) – What does a stock exchange operator do when equity markets are weak and interest rates are high? Pivot to the portfolio. Hong Kong Exchanges and Clearing (0388.HK) posted a 28% year-on-year profit pop on Wednesday, largely propelled by stellar investment returns as opposed to its core business. Sustained weakness in equities trading and initial public offerings could augur tougher times ahead if transaction volumes don’t come back soon.

Cheah Cheng Hye, chair of the HKEX’s investment committee, delivered HK$1.5 billion ($191 million) in portfolio revenue in the quarter ending March, a staggering 2,500% increase year-on-year compared to the HK$59 million in the first quarter of 2022. The funds that the $53 billion bourse invests in did well on the back of the high interest rate environment, but the pace of rate hikes is slowing. Analysts polled by Refinitiv expect its investment income to peak by the end of 2023 as the Federal Reserve looks to end its battle with inflation.

Chief Executive Nicolas Aguzin has his work cut out for him. Though Hong Kong’s IPO pipeline is better than many, with over 90 applications as of the end of March, the issue sizes are restrained. Baijiu-maker ZJLD (6979.HK), the biggest offering since CALB’s (3931.HK) $1.3 billion sale last October, only raised $675 million in its IPO, and slumped 17% on debut. Chinese regulators are tightening up approval of mainland companies that want to go public in the financial hub. As for volumes, average daily turnover last quarter was down 9% year-on-year while trading by investors in mainland shares through Hong Kong’s Stock Connect Scheme was down 8% in the same period.

Thus while technically the last quarter was HKEX’s second-best ever in revenue terms, investors booed; HKEX shares fell 1.5% the following morning. Aguzin can take the win for now, but shoring up the city’s IPO and equities markets is the biggest obstacle to long-term success.

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CONTEXT NEWS

Hong Kong Exchanges and Clearing reported first-quarter results on April 26. Net profit amounted to HK$3.4 billion ($434 million), up 28% from a year ago, with revenue and other income rising 19% year-on-year to HK$5.56 billion.

Shares of HKEX climbed more than 2% before paring back to 1.23% at the end of the trading day on April 26.

Editing by Pete Sweeney and Katrina Hamlin

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