At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about economic, political and financial developments that are likely to have an impact on the way institutional investors assign their money. And then, one year later, we revisit these forecasts to see how well we did.
Our ninth and 10th Year of the Dog forecasts focused on whether institutional investors were likely to begin engaging with artificial intelligence-managed fund products, and which Asian stock market looked most likely to outperform.
Will regional Asian institutional investors embrace robo funds?
Answer: no – correct
Artificial intelligence (AI) has become increasingly fashionable topic over the past few years of the investment industry. The idea of having highly sophisticated algorithm-based programmes ‘picking’ investment portfolios that sift through quantities of data to find unique investment ideas that a human being couldn’t possibly process has long been a utopian ideal for fund houses.
Is also currently largely in the realms of science fiction. Instead, today's robo adviser funds most frequently are automatic programmes that allocate investments into a portfolio of exchange-traded funds, according to the risk and performance preferences of the end investor.
This has been steadily gaining ground among retail investors, albeit from a low base. Singapore’s Monetary Authority of Singapore, for example, issued robo-advisory guidelines for such managers in October 2018. But these plans were focused upon retail-focused companies, which dominate the space even in the US, the most developed robo-advisory market. The likes of Betterment and Wealthfront were estimated to have $14 billion and $10 billion in assets under management, respectively, in August 2018, while Schwab and Vanguard have even bigger robo funds in the US.
But institutional investors don’t use robo funds. There are many reasons for this. For one, larger asset owners employ their own investment divisions, which are tasked with effectively managing their investment and risk needs, unlike the typical retail customer.
In addition, these investment teams have little incentive to place money into automatic allocation tools that could effectively replace them. Added to this, asset owners tend to get even better commission rates by investing through passive index funds over ETFs, so the cheap fees of robo advisors don’t appeal as much. Last, belief in the value of active investing continues to linger, despite a dearth of evidence across the past decade and more.
While no Asian institutional investor has (at least publicly) started using robo advisers, several are investigating how best to use technology and AI to become better investors. Japan's Government Pension Investment Fund (GPIF) worked with Sony Laboratories to use learning technology to more quantitatively assess fund performance, in order to better pick good managers. Similarly, Australia's Future Fund has been investing in technology to better sort through data and find indicators of god investments, which included creating a new role of chief technology officer.
This sort of research will eventually create the sort of robo funds that best meet institutional investors' purposes - most particularly identifying alpha. The first robo fund for asset owners may not be that far off.
Which Asian stock market will outperform?
Answer: China’s stock markets – incorrect
This marked another poor prediction by AsianInvestor. In truth, China was the worst-performing Asian stock market in 2018. Indeed, its stock indexes were some of the biggest losers globally.
Over the course of 2018, the Shanghai and Shenzhen composite indexes plummeted by 24.59% and 33.25% respectively, compared to their last close of 2017.
These major drops were mainly down to the US-China trade war and a downturn in the Chinese local economy. Ratcheting trade tensions between the two economic powerhouses featured in news headlines most weeks last year, with relations between the countries appearing to sour rather than improve as 2018 was drawing to a close.
This backdrop had a big impact on the Chinese economy, especially on the technology shares that had most supported the strong performance of its stock markets in 2017. For instance, the share price of games and chat app company Tencent plunged nearly 47% compared to its highest point last year. Chinese shares related to semiconductors also dropped, due to lower demand on smartphones.
That wasn’t all. China’s economy has struggled to maintain its vigorous growth in recent years. The country’s manufacturing Purchasing Managers' Index (PMI), which reflects the confidence of companies, hit 49.4 last December, the lowest in over two years.
Most other Asia Pacific stock markets didn’t fare too much better, with declined across almost all countries. However, two bucked this trend. New Zealand’s stock market climbed 4.92% over the course of the year. More impressively, India’s Sensex index rose 6.02%.
One of the reasons is India did well is that the country’s economy does not rely as much on exports as China, Japan or Singapore, which means it has been relatively less affected by the trade war. Exports only comprised about 11.65% of India’s GDP in the 2017-2018 fiscal year, versus 19.76% of China’s in 2017, according to the World Bank. The youth of India’s population – with an average age of 25 – also contributed to the generally positive investor sentiment for the country.
It doesn’t hurt that its economy has replaced China’s as Asia's fastest grower. India’s GDP is expected to grow by 7.3% in the fiscal year ending March 31, while it expanded by about 43% over the past five years. The country is set to overtake the UK to become the world’s fifth biggest economy in 2019, according to the International Monetary Fund.
Now all eyes are turning to the country’s upcoming general election, to discover how likely it is that India can maintain this economic improvement through 2019 and beyond.