Asia’s affluent individuals are largely retaining their equity allocations for now, despite growing concerns about high stock prices in the region, say wealth managers and investment specialists.

Yet the widespread consensus is that return expectations will need to be tempered for 2018, after stellar performances in several Asian equity markets this year. The MSCI Asia ex-Japan index has returned around 38% year to date in dollar terms, while the MSCI World has put on 21% over the same period.

Asia-based family office executives told AsianInvestor earlier this month that they are worried about high equity valuations across the board and cautious about further allocations amid concerns over rising risks.

And some large institutional investors, such as Australia’s Future Fund and the Third Swedish Pension Fund, also voiced concerns at AsianInvestor’s Southeast Asian Investor Forum earlier this month.

But few investors seem keen to cash out their Asian equity positions just yet.

One likely reason is that they have little choice in today’s yield-starved markets. Bonds are offering precious little juice given prevailing rock-bottom interest rates, and alternative assets such as private equity and real estate are crowded and expensive.

With so many markets rallying and hitting record highs, appetite for equity investments among wealthy Asian investors has increased, noted Philipp Bärtschi, Bank Sarasin’s CIO. This is despite the fact that they tend to prefer fixed income, he noted.

Equity allocations typically account for 20-30% of high-net-worth individuals’ portfolios in Asia, while up to 70% is allocated to fixed income, according to discretionary portfolio managers at private banks.

Steve Brice, chief investment strategist at Standard Chartered Bank, told AsianInvestor that his firm continued to see good investor traction in Asian markets, “whether it be equities or corporate bonds”. 

It helps that economic fundamentals have improved markedly after a multi-year deterioration that left Asian stocks undervalued relative to those in developed markets, he said.

China, Japan on the radar

As for specific markets, Harmen Overdijk, founding partner and chief investment officer of The Capital Company (TCC), an independent wealth manager, said he has seen an uptick in queries from clients about investing in China and Japan.

This comes on the back of strong gains in both markets. China’s benchmark CSI 300 has gained 20% year-to-date as of December 19 (despite falling some 6% since November 22), while Japan’s Nikkei 225 is up around 17% over the same period.

StanChart’s Brice noted: “The extremely strong performance of Chinese equities, especially in the large-cap technology stocks, has enticed investors back into the stock market.”

Moreover, most investors in Asia do not view a China meltdown as big a risk as is often portrayed in the Western media or research houses, which increases the perceived attractiveness of the region on a risk-return basis, he said.

Key challenges

In 2018, the key risk to expectations of equity returns will primarily be an unexpected change to inflation expectations, according to most experts AsianInvestor spoke to. If inflation accelerates more dramatically than expected, that could lead to a sharp re-evaluation of the interest rate outlook, which could derail the equities outlook globally.

“This is not a core scenario, but is something we need to keep an eye on as we go through the year,” StanChart’s Brice said.

With the US in the late stage of its economic cycle and with the unemployment rate already very low (4.1% in October), a pick-up in inflation is to be expected, he noted. Typically, wages start to rise and inflation picks up when a country is in the late stage of economic expansion.

“That said, excess capacity in other parts of the world [such as southern Europe and most emerging markets], should help reduce global inflationary pressures,” Brice added.

Meanwhile, said TCC’s Overdijk, investors continue to underestimate geopolitical risk, which in his view, is the biggest wild card of 2018.

Geopolitical uncertainties in Asia, as well as prolonged uncertainties associated with negotiations on Britain’s exit from the European Union, have positioned geopolitics as a key risk to watch for in 2018, according to a November survey by Depository Trust and Clearing Corporation, a US-based post-trade market infrastructure and services provider.

“The problem is it is very hard to predict these kinds of risks or prepare for them,” Overdijk noted.