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Asia’s fund selectors sour on emerging markets

Data collected by FSA shows a significant decline in sentiment toward global emerging market equities and Asia-Pacific ex-Japan equities among fund selectors in Hong Kong, Singapore, Thailand and Malaysia.

Participants in the Fund Selector Asia Asset Class Research, a quarterly survey of long-term (12 month) sentiment of fund selectors in Hong Kong, Singapore, Thailand and Malaysia, have shown a markedly lower interest in buying global emerging market equities in June 2018, when the most recent data was collected, compared with the result three months earlier.

Long-term sentiment toward global emerging market equities

Data: FSA

The question FSA posed was: “In the next 12 months, will you increase your asset allocation to global emerging market equities, decrease it, maintain it at the current level, or you don’t invest in it?”

In June 2018, only 28% of respondents said they would add to their allocation in the next 12 months, compared to 60% in March 2018, while 30% said they would reduce it, compared to only 4% in March.

The sentiment, which FSA measures by subtracting the number of sellers from the number of buyers, dropped below zero in June for the first time since FSA started collecting data in early 2017. It indicates that more fund selectors plan to reduce their allocation than to increase.

A similar, if smaller, change in sentiment has been noted for Asia-Pacific ex-Japan equities. While still positive, the June numbers show the lowest sentiment level toward the sector since FSA started collecting data.

Long-term sentiment towards Asia-Pacific ex-Japan equities

Data: FSA

This shift in sentiment is likely a result of the uncertainty brought on by the trade tariffs the US and China imposed on each other earlier this month, according to Isaac Poole, chief investment officer at Oreana Private Wealth.

He noted that there are idiosyncratic risks in some emerging markets such as Argentina, Turkey or South Africa, but stressed that he remains positive on Asia. “The fundamental outlook [toward Asia] hasn’t really shifted over the last six months,” he told FSA.

“The uncertainty around the trade negotiations might have an impact on the growth premium that Asia enjoys over developed markets,” he said.

The Asian equity risk premia has been small over the last few years, driving up valuations, he added. As risk premia increase, “we see valuations pushed lower”, he said.

Based on the firm’s two-year outlook, he sees the change in valuations as a buying opportunity.

Poole noted that he expects to remain overweight Asian emerging market equities, including China, and underweight other regions, for the next year at least, to continue benefiting from strong fundamentals and the healthy structural position of the region.

Part of the Mark Allen Group.