As the coronavirus pandemic enters a third year, the world is still coping with omicron cases, leading to subsequent frontline labour shortages, system-wide flight cancellations, and other delays.
A recent survey by Natixis showed that over half of the surveyed Asia-based fund selectors said they are most worried about disruptions resulting from Covid variants.
“As the disruption of the omicron variant continues, on top of record-high inflation and everchanging geopolitical relations, professional fund selectors in Asia are expecting to see more challenges in 2022,” said Fabrice Chemouny, head of Asia Pacific, Natixis Investment Managers.
“Given the potential risk and volatility in the coming year, our survey shows that Asian respondents are looking for diversification, strategic allocations to private assets, active management, and ESG.”
Natixis IM surveyed 436 fund selectors in 25 countries managing $12.6trn in total client assets, from private banks, wealth managers, funds of funds, family offices and brokers.
Other top economic concerns among Asian fund selectors for the year also include earnings growth (47%), Sino-US relation tensions (32%) and less supportive central bank policy.
Inflation is seen as the second major risk by half of surveyed Asian fund selectors, after major economies posted highest inflation rates in decades.
Valuations and volatility are also cited as top portfolio concerns, with 82% of fund selectors believing that low interest rates have distorted valuations and 68% noting that large flows into and out of passive strategies exacerbate market volatility.
Given that many anticipate interest rate hikes in 2022, 80% of the surveyed fund selectors in Asia see rising interest rates as a top risk.
Despite the challenging outlook, long-term return assumptions in Asia have increased to 9.4% in this year’s survey, up from 9.1% last year.
Shifting to private assets
Amid a low-interest rate environment, Asia fund selectors are increasing allocation to private markets in search for yield replacements.
The Natixtis survey showed 43 of Asia selectors make infrastructure their top investor priority, followed by private debt (24%), and real estate (18%).
“With interest rates low, selectors may see infrastructure as an opportunity to provide a consistent source of yield. This strategy would only be enhanced by increased public investment like the $1 trillion US infrastructure bill,” said the investment manager in its report.
Fixed income markets have suffered a year of underperformance due to surging inflation and China’s property crisis, and is expected to come under greater scrutiny in 2022.
The survey found 33% of fund selectors in Asia say they expect to decrease allocations to rate-sensitive government and sovereign bonds for this year.
However, seven in ten of those who invest in green bonds say they are looking to increase allocations in 2022, as the shift to ESG-focused strategies continues to grow.
Driven by increasing ESG awareness among investors, firms are also implementing a range of ESG strategies to meet demand.
In Asia, 76% of the fund selectors say their firms are already thinking about investing for ESG impact or actively investing for it.