Investor sentiment in Asia has continued to deteriorate, according to the results of the latest quarterly ING survey that measures the sentiment and behaviour of mass affluent investors around the region.

The ING Investor Dashboard pan-Asia ex-Japan sentiment index fell 13% to 109 in the second quarter of 2008, with China and Southeast Asian markets leading the decline. This is the first time the index has moved into neutral territory from the previous ôoptimisticö levels since the introduction of the survey nine months ago. The index level was 125 in the first quarter of 2008 and 135 and 141 in the fourth and third quarters of 2007, respectively.

Considering the survey was conducted in June and stockmarkets in Asia have slid further from their levels a month ago, investor sentiment will likely remain gloomy.

ôWe are starting to have a depressing story,ö says Eddy Belmans, regional general manager for North Asia at ING Investment Management. ôThe fall in the index this time is the biggest so far and it is the third straight decline.ö

The ING index is based on the analysis of a quarterly survey commissioned by ING and carried out by research firm TNS. The term ædashboardÆ refers to the graphics first used to present the results when the survey was launched, using the control panels of an automobile.

First launched in October 2007, the survey tracks changes in investment sentiment and behaviour across 13 Asian markets, namely Australia, China, Hong Kong, India, Japan, Indonesia, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan and Thailand. This makes it the first survey to poll investor sentiment across all 13 markets. While the survey was across all those markets, the pan-Asia sentiment index excludes Japan, Australia, and New Zealand.

This latest survey was conducted among 1,313 mass affluent investors in the region, aged 30 years and above, with disposable assets or investments of at least $100,000 with the exception of Indonesia and the Philippines. In Indonesia, respondents had disposable assets or investments of at least $56,000 and in the Philippines, respondents with a monthly income of at least Ps250, 000 ($5,500) were allowed to take part.

Investors in Hong Kong look on the bright side

Hong Kong, which experienced the biggest drop in investor sentiment in the previous quarterÆs survey, stands out this time as the market where investors are most optimistic [excluding Japan, Australia and New Zealand]. The Hong Kong sentiment index is up 15% to 123 in the second quarter of 2008 from the previous 107. That makes Hong Kong the second most optimistic market in Asia, next to India where the investor sentiment index shaved off a mere five points and the mood is still decidedly upbeat despite that marketÆs hefty losses so far this year.

The survey shows that Hong Kong investors are counting on a market turnaround in the current quarter. Around 58% of Hong Kong investors think the stock market will rise this quarter compared to the 36% that said so previously. Around 54% of Hong Kong investors have a positive outlook for the economy in the current quarter compared to 46% previously.

The strongest indication of just how Hong Kong investors are taking the glass-is-half-full attitude is their expectations on investment returns. Around 63% of Hong Kong investors expect their returns to increase in the current quarter compared to 43% who had the same expectation previously. ThatÆs pretty hard to take at face value given how badly markets in Hong Kong and the rest of Asia have performed so far this year. Even Belmans notes that ôitÆs hard to deliver this news of better Hong Kong investors sentimentö on a day when the market is down nearly 4%ö.

One possible explanation for the optimism in Hong Kong (and India) is human nature. ôWhat we have seen from this survey is typical; respondents are always more optimistic about the futureö even if the past has been pretty negative, Belmans says. Being systematically positive about what is to come tends to feed into the respondentsÆ answers, he says.

Indeed, around 59% of Hong Kong investors expect their personal financial situation to improve in the current quarter compared to 43% previously. Around 32% of Hong Kong investors believe the US economy will improve in the current quarter, sharply higher than 11% previously.

ôHong Kong investors may appear to be more positive now because interest rates have remained low and the economy remains healthy due to the diversity of its businesses and industries, and the resilience of the property sector,ö Belmans says.

ôThe more savvy investors from Hong Kong may also be more confident as they see an opportunity to enter the markets to pick out undervalued investments. While it is difficult to say exactly when the markets will experience a turnaround, we see market entry points particularly in the second half of 2008 for long-term investors,ö he adds.

One area where Hong Kong investors are cautious is property. Around 75% of Hong Kong investors think it the timing is not right to buy property.

Investors in China feeling the heat

The China sentiment index, meanwhile, fell sharply to 117 in the second quarter from 136 previously, moving from optimistic to neutral for the first time despite continued growth in the economy and the upcoming Olympic Games in Beijing. The index results suggest that investors in China are beginning to absorb the effects of the global economic slowdown and market pressures, after the shift in sentiment lagging the region in the past. More Chinese investors say their economic situation, return on investments, and personal financial situation deteriorated in the second quarter.

The data also shows that 87% of Chinese investors expect the Chinese economy to be boosted by the Beijing Olympic Games while in Hong Kong, which is co-hosting the Games, 76% said the same thing.

ôWe believe the overall net effect from the Sichuan earthquake and the upcoming Olympic Games will be minimal on the Chinese economy. The reality is that China, and the region as a whole, have not decoupled from the US or global markets,ö Belmans says.

ôChina has clearly been impacted by the knock-on effects of the US economy, rising oil prices, a fall in its domestic equity markets and rising inflation. It seems that investor sentiment in the high-growth markets like China lags that of the developed markets in terms of investor reaction towards the global economic slowdown,ö says Belmans.

Politics adds to concerns in Southeast Asia

Elsewhere in Asia, developing markets in Southeast Asia led the overall decline in investor sentiment in the region as local market and political developments coupled with global economic pressures weighed on investors. Thailand and Malaysia registered the largest decline in investor sentiment, followed by Indonesia and the Philippines. The Thailand investor sentiment index fell to 81 from 131; MalaysiaÆs fell to 82 from 128; IndonesiaÆs fell to 108 from 131; while the PhilippinesÆ fell to 110 from 121.

ôThe Southeast Asian markets in the past quarter, particularly Thailand and Malaysia, have been affected on several fronts including rising inflation, oil prices and political challenges,ö says Mike Ferrer, regional general manager for South Asia at ING Investment Management. ôMany of these markets also have a higher exposure to rising oil prices compared to the rest of the region, and with the added impact of recent cuts in oil subsidies in some markets, it is not unusual to see that they have led the fall in investor sentiment in Asia.ö

Across Asia, investors expect inflation, which remains a major concern for them, to rise. The survey shows that 61% of Asian investors, excluding those in Japan, expect inflation to continue rising, while 81% of them expect inflation to affect their investment decisions in the current quarter. Around 57% of them are considering reallocating their investment portfolios or investing more to hedge against growing inflationary pressures.

ôRising inflation generally does not help the equities market and together with the credit crisis worsening and US equity markets falling, sentiment will continue to be affected in the region,ö says Belmans. ôCoupled with higher interest rates in many markets in Asia, we believe investors are currently sitting on the sidelines with their money.ö