Whether rebounding investor sentiment in Asia translates into a concerted advance into liquid assets will depend on the outcome of the upcoming Group of 20 (G-20) summit, says ING Investment Management Asia-Pacific.
The latest quarterly ING Investor Dashboard Survey, released yesterday, shows a 7% increase in pan-Asia (ex-Japan) investor sentiment in the three months to end-September, from the previous period.
Fears over the likelihood of a double-dip recession in the region and negative impact from the eurozone debt crisis appear to be receding amid improving confidence in domestic economies.
Investor outlook on the stock and property markets is strengthening, with an expected upside of 8.4% in domestic equity markets and 5.8% in property markets.
However, such sentiment is not being mirrored in capital allocation, with 76% of survey respondents listing cash/deposits as their top choice of investment tools.
“There is this dichotomy that on the one hand people want to participate in the equity and property markets,” notes Pranay Gupta, ING IM’s chief investment officer for Asia-Pacific. “The survey shows they are willing to invest in risky assets, but on the real side when you drill that down into investment tools they are more conservative.
“I think that is primarily driven by the fact that they are still not comfortable that the world is playing out the way it should. The risk that they think they want to take, and the risk that they are actually taking do not coincide. The determinant of which way this goes, whether it goes back into cash or into liquid assets from a domestic standpoint, will be determined by the G-20 summit.”
Perhaps most striking from the survey was a 15 percentage point increase in Asia (ex-Japan) investor expectations that the US dollar will depreciate against other currencies in the next quarter.
Finding an amicable solution to global currency tensions will be high on the G-20 agenda as finance ministers and central bank governors convene in Seoul next month to discuss building a counter-crisis global financial system. And according to Gupta, it could go one of two ways.
“Either the West and the East come up with a timetable by which local currencies in Asia do appreciate and the global imbalance works out, or the directive [from the summit] turns into an actual war and protectionism and dumping duties in the US and capital controls in Asia,” he says.
“The latter is detrimental to everyone concerned, so the only possible solution, I think, is for China, the US and the other economies to work out how and when that [amicable solution] is going to happen.”
He suggests that positive signals and a timetable for discussion would be a reasonable outcome from the G-20 discussions, setting the world “back on a normal path again”.
Interestingly, though, Gupta does not believe that Asian investors are paying much attention to likely currency appreciation in their allocation decisions. “Domestic investors have their liability based in their domestic currency, so it does not really affect them unless they are multi-currency players,” he says.
“I think the lag effect of when the currency appreciates and when it comes back into the real economy in terms of export capability being hit is still six months away.”
At the same time, he notes the likelihood that India will allow the rupee to appreciate and says “valuations are at reasonable levels, and unlike in previous cycles it does have a very good domestic demand story”.
Gupta adds: “What is more important across asset markets is that individual stocks are not driving the return of portfolios. What is driving the return of portfolios is big themes that will happen irrespective of what happens in the currency decision, so things like outsourcing or new technology, infrastructure spending, demographics and domestic demand.
“Over the last six or nine months, those things have a bigger proportion of total return in portfolios than individual stocks.”
But Gupta also believes that Asian investors are in danger of underestimating risks that are inherent when sentiment surrounding equity and property markets is buoyant. “Investors should not go into areas that are completely dependent on short-term strategic policy moves and have the possibility of turning one way or another,” he states.
He lists three chief risks as a negative outcome on the currency front; that money pouring into emerging markets is not strategic but hot, meaning it could flow back out again as the US economy recovers; and the balance between Asian economies changing from being export-led to being domestically driven is not yet sufficiently developed.