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Asia fund selectors tilt towards Apac ex-Japan equities

Despite their pessimistic macroeconomic outlook, Asia's third-party fund buyers are positive on China and Asia-Pacific ex-Japan equities, according to Last Word Media research.

The impact of the Covid-19 pandemic has inevitably soured the optimism shared by many fund selectors in the region at the start of the year; but many are looking beyond the current crisis.

A surveyed sample of 250 top decision-makers found that there was strong future demand for China equities, as well as other Asia-Pacific ex-Japan and global equity funds.

“Our high-level Asian investors are noticeably less optimistic now than at the end of 2019,” said Abtin Pourgive, head of research at Last Word Media.

“But, focusing purely on their forward-looking investment sentiments, one does not get the same sense of doom that has gripped the markets over the past few weeks,” he added.

The quarterly survey, conducted by Last Word Media, identifies likely investment flows across 24 asset classes by asking fund selectors in Hong Kong, Singapore and Thailand for their expected allocations over the next 12 months.

Their overwhelming favourite was China equities, with almost 60% of respondents intending to increase their allocation to the asset class, while only about 15% plan to reduce their exposure.

The enthusiasm was shared by most of the 20 to 25 global fund managers also surveyed between late-February and mid-March, although they were far less keen about the wider universe of Asia-Pacific ex-Japan and global equity funds.

The MSCI China index was down 10.22% in the first quarter of this year and the MSCI Asia ex-Japan index fell 18.37%, according to FE Fundinfo data. The former bounced slightly at the end of March as investors absorbed news that fatalities from the virus in China might have peaked, while there are concerns that a secondary or tertiary wave of infections might afflict other countries within Asia.

Nevertheless, both indices declined less than the broadly-based MSCI World index (-20.93%) and the S&P 500 (-19.60%) during the first three months of 2020.

In contrast, European and US equities remain unpopular, although the latter enjoyed a bounce in sentiment from the end of last year, according to Last Word Media research. Frontier market equities, convertible bond funds and index-linked products were the least liked, with far more sellers than buyers over the next 12-months.

Source: Last Word Media Research

In fixed income, unconstrained bond funds had the strongest demand among fund selectors, with around 30% expected to raise there allocations to the segment.  Next in popularity were G3 currency Asian bonds  — especially among Hong Kong-based selectors — and emerging market debt funds.

However, there is little future demand for low yielding, developed market government bonds following recent interest rate cuts and fiscal expansion packages, and which have already benefited from a rush to safe assets since late-February.

The Bloomberg Barclays US Government index was up 8.39% in the first quarter 2020, while the performance of the Bloomberg Barclays Global Aggregate index, comprising investment grade securities, was about flat.

Unsurprisingly, cash was also a popular choice for fund selectors as the Covid-19 pandemic worsened. However, although many survey respondents expected to raise their cash positions in the coming 12-months, those planning to lower their cash allocations were not far behind.

Comparative performance of leading market indices

Source: FE Fundinfo. US dollar returns for 1 January 2020 -31 March 20202

Part of the Mark Allen Group.