China tops EM list for institutional investors

Emerging markets that embrace reform seen to be converging with developed economies in the near term, finds Principal Global Investors' annual worldwide poll of asset owners.
China tops EM list for institutional investors

Institutional investors are most positive on China among emerging markets globally, finds a recent survey by Principal Global Investors (PGI).

Some 51% of respondents expect the country to make significant progress in implementing economic reforms over the next three years, according to the US asset manager’s ninth annual global survey of 704 institutional investors from 30 countries with a combined $29.7 trillion in AUM. The results of this study are due to be published later today,

“There’s a real spotlight on China and it’s slowdown, but our report indicates it continues to lead emerging markets with positive sentiment on its economic outlook and the reforms announced at the Third Plenum,” Andrea Muller, Asia CEO of PGI, told AsianInvestor.

The findings come after MSCI announced last week that it would not include China A-shares in its influential emerging markets index, as reported. The index provider cited restrictions on trading and capital mobility and uncertainty surrounding capital gains tax as stumbling blocks to inclusion.

But sophisticated investors are preparing for China’s inclusion, said Muller, although there remain a number of uncertainties.

Surveyed investors were most negative on India, with 32% saying they didn’t think the country would carry out significant reforms or make economic progress.

However, it should be noted that the survey was conducted in the first quarter before Narendra Modi’s election victory and subsequent multi-year Nifty and Sensex highs.

“India has been a global best performer this year, and it has big plans, but it also has challenges,” said Muller. “It may rank a little higher now, but China still tops the charts.”

The implementation of macro reforms in Indonesia and India, which are running twin current account deficits, will dampen growth, argued think tank Create-Research in a report based on the survey findings. Meanwhile, Singapore, Korea and Taiwan will fare better because they are rebalancing their economies.

Because of increased volatility, investors have become more discerning about investing in EM as reforms are being implemented at different speeds, the report said. Countries embracing reform are expected to converge structurally and financially with developed economies in the near term.

Turning to investment strategies, institutional investors have turned from buy-and-hold to a more opportunistic approach to EM assets.

As populations age, defined benefit pensions will transition from asset accumulation to liability, and move from buy-and-hold investing in EM to more opportunistic exposure, the report said.

Forty-eight percent and 51% of respondents view EM equities and bonds opportunistically, respectively, up from 30% and 15% in 2012.

In order of importance, respondents see slower economic growth, the end of quantitative easing, growing urbanisation and the rise of the middle class, economic rebalancing and liberalisation of domestic controls as driving emerging market asset prices over the next three years.

“Since talk of tapering a year ago, EM have progressed at different speeds,” said Muller. “Country risk is gaining importance over macro risk. It’s therefore important to look at features leading some EM to growth more quickly than others.”

Meanwhile, as age demographics in some Asian countries converge with those of developed economies, income funds will grow in popularity among retail investors in the former, the report noted.

Muller said some Asian pension funds are moving from passive vehicles to more active strategies for EM exposure because increased differentiation between markets means blanket passive strategies could miss growth in stronger economies.

Asian institutional investors are increasing their cross-border real estate exposure and are more interested in global equity, she added.

“In Asia, retail investors still haven’t embraced investing for the long term and retirement, which is why investors tend to fluctuate between investing in real estate and keeping their money in fixed deposits in bank accounts” she noted.

“Investment in real estate has increased in all client segments in Asia and the West as interest rates remain low. Real estate is a hybrid asset with bond-type features and equity-like returns. For many investors, investment in real estate provides inflation protection and regular income.”

The firm managed $317.6 billion in assets as of the end of this March.

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