The dark cloud of investment uncertainty has descended even further than many asset owners thought possible when 2020 began. 

Already grappling with how to tackle slower economic growth and volatile markets, sentiment took a significant turn for the worse in late January with the news of the novel coronavirus (Covid-19) outbreak.

The upshot has been abrupt changes in market direction and a new norm where previous conventional wisdoms no longer seem to count.

This is also clear from the results of AsianInvestor’s first Quarterly Sentiment Indicator of the year. Among those chief investment officers, asset allocators and other senior investment executives who were polled in mid- to late-February, 68% cited the economic fallout for China (and globally) of the coronavirus as their biggest concern for markets in the second quarter – dwarfing all other threats.

The effect is a muted outlook for the global economy in 2020. Not a single respondent predicted more than 3% growth – instead, two-thirds expect to see between 2% and 3%, a quarter said it would be between 1% and 2% and 25%, and the rest opted for less than 1%.Such pessimism is hardly a surprise – markets such as the Dow Jones Industrial Average, for instance, have returned to the days of 1,000-point movements (downwards). 

Judging by the lack of consistency among Asian institutions’ tactical asset allocation plans, this growing unease is feeding a lack of certainty about how to best react. Forecasts for the next few months, for example, swing from support for defensive plays via US Treasuries and traditionally defensive stocks on the one hand, to alpha-seeking strategies via windows of opportunity in private debt on the other. 

Consensus is also lacking within the equities and fixed income portions of portfolios. While 31% of respondents to the AsianInvestor poll said they will likely increase tactical exposure to emerging markets equities over the next three months, the same number said they expect to reduce tactical exposure to this same asset class. The same pattern can be seen with G3 bonds.

Investors appear to have a clearer view in terms of developed market equities, which are generally in demand, and for local currency emerging markets bonds, which are not.

There is certainly clarity over appetite for greater exposure to various alternatives over the course of 2020. 

Thailand’s Government Pension Fund is an example of a regional asset owner that continues to ramp up its alts allocation – it stood at 13% of its Bt418.5 billion ($13.4 billion) investment portfolio at the end of September 2019, but could rise to nearly 20% going forward, given its need to soon start paying out more retirement benefits to the country’s aging population.

Across Asia, meanwhile, just over half of respondents (56%) plan to increase alts allocations by 0% to 5%, nearly a quarter (24%) are looking at between 6% and 10% more alternatives, and the remainder (20%) aim to boost it by more than 10%.

Within the second quarter, this will be implemented mostly by allocations to private debt. This is the asset of choice for 51% of respondents, especially insurance companies in Hong Kong and Singapore. Private equity (25% of respondents) and infrastructure (18%) are still sought after to some extent, while real estate (6%) is expected to take a back seat over the next few months.

More broadly, active strategies are in greater demand amid today’s volatile investment climate, despite the growth of passives over the past 12 to 18 months. Even within fixed income allocations, 75% of respondents said the likelihood of them using more passive vehicles in 2020 was “low” to “zero”. 

 

Methodology

• Results are based on the anonymous views of 40 executives from international and local insurance companies, public and corporate pension funds, government entities and endowments based in Asia, conducted during late February.

• AsianInvestor selected the target audience based on size of the investable assets of each institution.

• Respondents were mostly from Hong Kong, Singapore, South Korea, Indonesia and China.

• Each participant used the same set of multi-choice questions to ensure consistency in the dataset.

This article originally appeared in AsianInvestor's Spring 2020 magazine edition, which is out now.