Investors in China take the most risk in the region, while Japanese investors are the most risk-averse, according to a newly-released Asian survey.
The study of investor behaviour across key Asian markets suggests that neither China nor Japan is effective at ensuring investors have a balanced portfolio allowing them to attain their long-term financial goals.
Manulife Financial studied investor behaviour in Hong Kong, mainland China, Taiwan, Singapore and Japan. Its conclusions are that investors' appetite for risk across the region is at odds with their behaviour, with investors expressing a preference for more stable investments while in reality choosing to invest in higher-risk vehicles.
In particular, at a time when Chinese retail investors are at the mercy of stock market volatility, Manulife’s research confirms they are holding a higher proportion of risk assets in their household portfolios (44% compared with 32% in Japan).
Japanese investors are known to be more circumspect and the study confirms that Chinese investors are also far more likely (27% compared to 12% in Japan) to invest in “risky penny stocks”.
A Japanese household will keep 41% of their assets in cash, and when they do choose to invest in equities, will prefer to buy more stable blue chip stocks (75% in comparison to only 51% in China).
Investors in China are more likely to make one-off investments in mutual funds, suggesting a desire to capitalise on market buoyancy for short-term gains, says Manulife. Meanwhile, the Japanese tend to invest in mutual funds via regular instalments, suggesting a more disciplined approach.
“The recent stock market slide in China can be considered a cautionary tale for investors taking on too much risk,” said Ronald Chan, Manulife’s chief equity investment officer for Asia.
“Many commentators were speculating that Chinese equities were in bubble territory by mid-March 2015. However, investors went on to accumulate an additional Rmb1 trillion ($160 billion) in debt to finance short-term investments in richly valued stocks before the market peaked in mid-June. In the correction that followed, more than US$3.4 trillion in equity value evaporated over the three-week period.”
Investors from four of the five markets surveyed ranked guaranteed income and capital guarantees as their top two considerations when making any new investment. Yet investors in these markets still ranked stocks and equities as the most preferred investment vehicle.
While investors in China ranked top of Manulife's risk appetite index, more than half of respondents said they would want to see a guaranteed income before considering a new investment. This is in comparison to only 20% of Japanese investors wanting to see guaranteed income, despite them being the most risk averse. This contradiction between investment attitude and behaviour suggests that the Japanese understand the need to take measured risks to create a balanced and diversified portfolio, but are unwilling to part with their cash in order to achieve this. Partly this is due, says Chan, to their already greater exposure to long-term investments via pensions and other savings products.
More than a third of Hong Kong investors worry about making the wrong investment decision (36%), yet their preference for direct investment in stocks is the highest amongst the wealthiest Asian markets, at 63%. Meanwhile, nearly half of investors in Taiwan (48%) say they are put off from investing in mutual funds because of concern about the risks involved, but conversely favour higher-risk penny stocks almost as much as investors in China (22%).
Risk tolerance ratios for asset allocation of household balance sheets are calculated by taking the percentage of investors in each of the market who hold higher risk assets (Real estate investment; mutual funds; stocks; ETFs) versus the percentage of investors who hold lower risk assets (cash/deposits; cash deposits in foreign currency; insurance; fixed income investment).
Michael Dommermuth, head of wealth and asset management for Asia at Manulife, said: “The key to addressing the seeming contradiction between risk appetite and investment behaviour is to help educate investors on the actual risk and potential returns represented by individual asset classes and the market conditions in which they best perform.”
Chan observes that in the more stable and mature markets, investors have learned to use mutual funds for regular income needs, but in less developed markets such as China, they are still at an early stage of developing products for this purpose.
He sees a big opportunity for fund groups to offer income and annuity type products, as the pension market expands in China, but it depends on how government policy evolves. He sees “very strong demand from corporate pensions, and the development of government pension schemes will be a key market for us to play in."
Currently, he observes “there is a lot of disconnect in the system,” in terms of people’s ignorance of long-term savings objectives but also in terms of the National Social Security Fund’s objectives and liability management. It is this immaturity that is partly responsible for the statistical anomaly of China in the Manulife study.
Manulife is currently focused on sales of its multi-asset asset allocation products through various channels, including MPF lifestyle funds in Hong Kong and corporate mandates in Singapore, especially with local authorities, says Chan: “Multi-asset is increasingly popular in Singapore and we expect this trend to be followed in Hong Kong. In Taiwan also, multi-asset is getting a lot of traction, even at a retail level.”