Retail investors remain driven too much by sentiment and are therefore too exposed to certain asset classes, warns Bruno Lee, head of regional wealth management at HSBC in Hong Kong.

The bank has been encouraging some customers to ôrevisitö their investments in agriculture and commodity funds, which continue to enjoy good returns but are volatile, and not suitable for too-large an exposure as long-term investments.

He hopes investors realise there are good opportunities now in regional equities (particularly Greater China) and structured products. ôGiven the first-half drops in market levels and turnover, investors have been cautious û maybe too cautious,ö he says.

For example, the Hang Seng Index has fallen from a peak of about 32,000 points in October, 2007 to around 22,000 today. Given the long-term growth potential in the Chinese economy, this looks more like a time to accumulate, not to sell û but many investors are waiting for a clear sign of recovery.

HSBC is also trying to highlight the value to be found in many fixed-income funds, particularly in credit, where yields remain historically wide, even in high-quality products.

Fear of inflation has instead driven many retail investors into commodity and agriculture funds. ôFirst-half returns in these areas have been good, but weÆve become cautious,ö Lee says. ôWe are seeing reports from around the world about how one reason for the increase in commodity prices is the inflow of retail investments.ö

Right now the biggest demand among HSBCÆs mass affluent customers around the region is for structured products. Lee says this time is not like the structured-products boom of 2002-04, when retail money from Hong Kong, Singapore and Taiwan poured into these funds at exactly the wrong time.

These products were usually 100% principal protected with low participation rates and, in the end, provided negligible upside while locking away investorsÆ money when the regionÆs stock markets really took off.

This time HSBC is promoting products such as Man InvestmentÆs AFL futures fund, a recent version of which does not protect 100% of principal û and, importantly, comes with 100% participation in the futures strategy. ôThe underlying investment can provide good value,ö Lee says.

Equity-linked notes (ELNs) have also been big sellers.

Lee says this year the proportion of assets from retail investors flowing into structured products has outpaced those directed at funds, reversing the trend of the past two years. This began with investors in Hong Kong, has moved to Korea and is now happening in Singapore. He also expects it to happen in India, where banks are beginning to distribute ELNs with similar characteristics û that is, not wholly protected but offering a high level or full participation in the underlying strategy, usually with short duration (a year or less).

ôStructured products can still provide decent returns in volatile markets,ö Lee says. ôBut investors do have the risk of being stuck with the underlying for the long term.ö And with less than full protection, a prolonged market downturn will still hurt investors in the new breed of structured products, he says.