Northern Trust: instos seek Asia tilt in EM portfolios

Western asset owners have been showing a bias towards Asia in their passive global emerging-market allocations, says Wayne Bowers of Northern Trust Global Investments.
Northern Trust: instos seek Asia tilt in EM portfolios

While Asia-Pacific institutional investors have moved to broadly diversify their global exposure this year, their peers in the West have been adopting a stronger Asia tilt in their emerging-market portfolios.

So said Wayne Bowers, chief executive and chief investment officer for international markets at passive investment specialist Northern Trust Global Investments, speaking to AsianInvestor last month.

Now that global investors “have got their EM bucket filled”, he said, “they are looking to go a bit overweight emerging Asia. We’ve been seeing that sort of tilt more over the past six to nine months in RFPs and mandates or changes to mandates.”

One notable example of this trend in recent years is the move by Abu Dhabi Investment Authority, one of the world's biggest sovereign wealth funds, to open an office in Hong Kong last year to improve its access to assets in China and the wider region.

London-based Bowers said he could not provide figures to quantify this trend, but he sought to explain the rationale behind it.

“People have looked at Latin America and seen the returns, but also the volatility and the risk there,” he noted.

The violent suppression of protests by Venezuelan president Nicolas Maduro in recent weeks are the clearest recent examples of upheaval. Moreover, comments in the past week by US president Donald Trump mooting military intervention in Venezuela appear to have cooled the desire for neighbouring governments, such as Argentina and Colombia, to act against Maduro.

There is interest in Middle East and North Africa assets, added Bowers, but there too investors must contend with instability on several fronts. There are ongoing conflicts in Syria and Iraq, not to mention a political stand-off between Qatar and some of its neighbours, including Saudi Arabia and the UAE.

Meanwhile, central and eastern Europe are attractive, said Bowers, but there are worries about potential further changes to borders or influence by Russia in that region.

“So you end up with quite a major interest in Asia,” noted Bowers.

In addition to the negative issues putting investors off other emerging markets, Asia boasts some increasingly important ‘pull’ factors, he said.

A key development is that the region has shifted from being seen as largely a mass-manufacturing centre to one that is designing and producing high-quality goods.

“Look at [Chinese brand] Huawei phones,” said Bowers. “Previously they might have been seen as cheap handsets, but now [the company] has quickly matured into a standalone brand with excellent versatility at a really good price point.

“Investors are saying Asia is not just a manufacturing hub any more,” he noted. “There’s some innovation and manufacturing quality that you’re not necessarily seeing in the Middle East, Eastern Europe or Latin America.”

Asian investor interest

As for demand coming out of Asia Pacific for international exposure, institutions in Australasia and Taiwan have been the most active in looking to globalise their portfolios, said Bowers, followed by Japan. Chinese asset owners, on the other hand, have been very quiet this year on this front, he noted.

Specifically, Bowers noted, Asian asset owners have been increasing their allocation to passive US investment-grade bond strategies over the past six to nine months.

They like the fact that it is a very deep and liquid market, offering higher yield than they would get from corporate issuers in most Asian markets, he said. “You don’t have to look in the dark corners of the alternatives world to pick up 2.5% to 3% steady income flow.”

In addition, European stocks have attracted a lot of interest and some flows from Asian investors in the past few months, added Bowers, as AsianInvestor reported last week.

This demand has emerged now that worries over the rise of populist parties – such as in France under Marine Le Pen or in the Netherlands under Geert Wilder – have dissipated somewhat, said Bowers. Both leaders failed to strengthen their position in general elections in March and April, respectively.

“From an Asian investors’ perspective,” said Bowers, “there’s been a sigh of relief and a thinking: ‘maybe we can put more money into Europe’.” 

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