AsianInvestor and Clifford Chance’s annual survey of regional industry executives finds expectations for investment into public equity markets rising strongly, most notably at the expense of alternative vehicles.
The survey received 244 responses, up from 160 last year, primarily from regionally located business and sales executives among asset management firms, as well as from some asset owners and distributors of investment products.
Consistent with last year, equity capital markets (ECM) emerged as the favourite means for investors to allocate capital to Asia in the next 12 months. While it topped the poll in 2012 with 41%, this year a more dominant 61% of respondents had it among their top three choices.
While this shows demand for liquid, non fixed-income-like returns, appetite for exchange-traded funds (ETFs) also saw a healthy bump to 43%, from 30% last year. Indexing has been growing in popularity, and a diversified, cheaper way to play the equity upswing is seen as likely to take root after the uncertainty of 2012.
Noticeably, money-market funds halved from 18% last year to 9% this, although this could be more to do with expectations of allocation away from other asset classes into equity.
Nowhere was this more apparent than for alternatives; private equity, managed accounts and hedge funds fell in appeal across the board this year. PE as a vehicle for investment to Asia received 26% of the vote across the top three choices, from 32% last year. Managed accounts stood at 21%, down from 28%, while hedge funds sank to 15%, from 23%.
Given that the environment for fundraising is much improved this year from 2012, this appears contradictory, notes Kai Schneider, a partner at Clifford Chance in Singapore.
“Private equity funds saw a drop and I am not sure that is consistent with what we are seeing in terms of fundraising,” he says. “But I don’t think it’s that people are averse to other asset classes, it’s just that they are more pro the public markets.”
If the stock market is seen as the most likely investment destination, China (including Hong Kong) overtakes Asia ex-Japan as the geography that will receive the most capital, at 49%.
But given that China’s markets are still largely closed and you have limited access to A-shares through the qualified foreign institutional investor (QFII) route, that is really a bullish vote for Hong Kong-listed stocks. This may seem like a strange outcome given the bloodbath in that market in late June, but should reflect a longer-term outlook. (The survey also was conducted before both the US Federal Reserve and the People’s Bank of China faced off markets over tightening policy.)
North America is consistently favoured as a destination of capital at 43%, having swallowed its fiscal medicine and rebounded, while continental Europe remains mired at 11%. The unknown is what happens when the plug is pulled on quantitative easing.
Southeast Asia saw a noticeable bump up to 42%, from 34% last year. But the real story is Japan as a favoured geography, surging from just 5% of respondents’ picks last year to 27% in 2013.
In fact, Asia including Japan was picked most often as top choice as likely to receive the most capital – a resounding vote for Shinzo Abe’s reform agenda. At the same time, Asia ex-Japan fell markedly in our survey with 35% of the vote, down from top spot last year at 58%.
"These figures confirm what we have been seeing for some time," says Matt Feldmann, a partner at Clifford Chance in Hong Kong. "There are a lot of fund managers looking at Japan again, in a variety of asset classes, from equities over credit to real estate."
Australia/New Zealand noticeably dipped to 3%, from 11%, a reflection of what has been a strong Aussie dollar and the forthcoming federal election in September.
Asked which asset class Asian asset owners would invest in most over the next 12 months, global equities emerged top at 36%, followed by Asia ex-Japan equities (33%) and high-yield debt (29%).
Global emerging market equities and emerging market debt sank down the list to 25% and 23%, respectively. EM equities have seen a steady decline in our poll, from 34% two years ago, to 29% last year and now 25%.
“One of the things I hear time and time again now is that you can get the same returns in the US [as emerging markets] now, but with much less risk,” notes Mark Shipman, a partner at Clifford Chance in Hong Kong.
Europe/UK equities propped up the foot of the table at 4%, behind even commodities/futures at 8% and asset-backed securities at 7%.
Meanwhile, managers have moderated their expectations for net flows from pension funds and sovereign wealth funds in the next year, although they remain top in this category.
On the rise have been insurance companies and central banks, with the latter having started to invest in asset classes previously considered unthinkable such as equities (see the May 2013 edition of AsianInvestor).
Also notable is the fact that 20% of managers put family offices/high-net-worth individuals as their top choice, indicating they are becoming wealthier – which could be a derivative of the emergence of wealth in China and Indonesia.