Bucking a wider global retreat from equities among sovereign investors, those in the Asia-Pacific region appear to be gearing up for more, a comprehensive new survey published on Monday shows.
The Invesco Global Sovereign Asset Management Study conducted by NMG Consulting in the first quarter of this year polled 139 funds, comprising 68 sovereign investors and 71 central banks in total and including 33 and 14, respectively, in Asia.
A third of the respondents in our region indicated that they planned to increase their exposure to equities over the coming year, compared with 22% across the whole global study.
In a release, Terry Pan, fund firm Invesco's chief executive for Greater China, Southeast Asia and Korea, said the findings revealed nuanced regional variations but clearly showed that “a higher proportion of Asia Pacific respondents plan to either maintain or increase their exposure to equities".
The report also noted that only 6% of Asia Pacific sovereign investors were intent on reducing their listed equity holdings in the next 12 months.
The increased Asian bet on equities comes after a “weak and volatile equity market” helped gouge five percentage points off sovereign investment returns in 2018 after a 9% yield in 2017, it said.
That said, fixed income has “re-emerged as the primary allocation for asset owners” globally.
As recently reported by AsianInvestor, Asian pension funds are turning to global equities for better returns and diversification as they seek to keep pace with the funding requirements of their fast-ageing populations.
In a separate interview, Pan told AsianInvestor that for all the increased appetite for risk assets, he expected Asian sovereign investors to take long-term and prudent approach when adding equities to their portfolios.
Citing his experience with sovereign clients, he said it would likely not be as simple as just being overweight in a specific country but more like having mandates that could be global or in developed markets but “with a very specific factor theme to them.”
So these institutions could “just be looking to add a factor component into their equity position", he said.
APPETITE FOR INFRASTRUCTURE
Equities are not the only asset class in the sights of Asia-Pacific sovereigns in their quest for more yield; regional infrastructure is another.
“Two-thirds of respondents [in Asia Pacific] plan to make further infrastructure investments outside of their home but still within the region in the next 12 months,” Pan said.
Currently, all of the region’s respondents already hold some infrastructure assets versus 84% globally.
But doing so doesn’t come without challenges.
The biggest one, Pan said, is how investors balance the pace at which they deploy capital against their return targets given heated competition for attractive assets.
“The rate of returns drops the higher you bid while the toll revenue [from an infrastructure project] doesn’t necessarily increase, and inevitably the return goes down,” he said.
Another issue is political risk.
Owing to the regulatory approvals often required on infrastructure projects, if changes in government or policy take place “it might be detrimental sometimes.”
An executive at one of the Asia-Pacific sovereign respondents to the survey also highlighted their concerns when investing in emerging market infrastructure assets.
“Globally, political extremism is a real risk now and the potential impact on – and risks to – investing in large monopolistic assets seem to me to be underappreciated. There are a lot of investors pursuing emerging market infrastructure assets, for example,” the executive said.