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Asia’s fund selectors turn risk-on in 2020

China and Apac are their favourite equity markets in 2020, as fund buyers look to reduce exposure to developed market bonds, according to Last Word Media research.

A surveyed sample of 250 top decision-makers found that Asia fund selectors were noticeably more optimistic in the final three months of 2019, compared with every other quarter last year.

Last Word’s quarterly research seeks to highlight likely investment flows by asking Asia’s fund selectors for their allocation views over the next 12 months.

Chinese equities are the most in-demand asset class among fund buyers in Hong Kong, Singapore and Thailand, while Asia ex-Japan equity markets in general have cemented their place towards the top of their list of preferences.

The repeated failure of the US and China to reach a resolution of their trade dispute weighed on Asia market performance last year, with China’s slowing economy and political turmoil in Hong Kong also sapping confidence.

The MSCI China index returned 23.66% in US dollar terms last year and the MSCI Asia ex-Japan index posted 18.48% return, both lagging the broadly-based MSCI World index, which returned 27.29%, according to FE Fundinfo data.

Reflecting the poor investor perception and contributing to the indices’ underperformance, Greater China and Asia ex-Japan funds suffered net outflows of $9bn and $6bn respectively up to the end of October 2019.

However, the increasing prospect of the signing of a Phase One trade deal in early January clearly boosted sentiment towards the end of last year.

Last Word found that about 50% of fund selectors expect to raise their exposure to Chinese equities and around 35% to Asia ex-Japan stocks.

Forward-looking allocation views of Asia’s fund selectors

Source: Last Word Media Research. Consensus of forward 12-month allocation.

Yet, it is not only the regions’s domestic stock markets that have excited the specialists responsible for allocating assets to fund managers.

European equities have climbed up the rankings after several months of floundering as one of the least favourite asset classes, and US equities shifted to slightly overweight from neutral. European equities were by far the the biggest casualty of investors’ nervousness and risk-aversion last year, suffering a net outflow of $93bn up to October, according to Morningstar data.

Souring on fixed income

The big winners last year were bond funds, which attracted “tactical” allocations from fund selectors keen to mitigate risk and curb volatility. Collectively, developed market, emerging market and global bond funds pulled in net inflows of $430bn up to October, according to Morningstar.

However, the meagre diet of secure income and steady prices now holds little appeal, with the temptation of feasting on the more appetising returns from equities.

In fixed income, fewer than 10% of fund selectors intend to increase their allocations to developed markets of any credit rating, with net sentiment turning negative 22% for government bonds and negative 26% for high yield fixed income.

However, the research also found a significant divergence of opinion between fund selectors and the firms that manage the money in regards to some asset classes.

For instance, investors are clearly more enthusiastic about Asia ex-Japan and European equities. Indeed, the more cautious attitude of several fund managers towards risk assets is reflected in their 2020 strategic recommendations.

Nevertheless, there is one unambiguous consensus from the Last Word survey: both fund selectors and managers are bearish on international government bonds.

Comparative returns of MSCI World, Asia ex-Japan and China indices in 2019

Source: FE Fundinfo. One-year total returns in US dollars.

Part of the Mark Allen Group.