Although the best forward looking investment sentiment is for alternative strategies, such as absolute return and hedge funds, unconstrained bond products, multi-asset funds and private equity, the most favored conventional asset category is Chinese equities.
The latest survey of fund selectors in Hong Kong, Malaysia, Singapore and Thailand , from Last Word Research, found that China equities are preferred ahead of other equity markets, with net buying sentiment over the next 12 months in excess of 20%.
The MSCI China index is up 12.5% this year (to 15 July), having bounced back in June following May’s sharp decline, according to FE Analytics. Investor confidence and market performance appear to be closely determined by expectations of the success or failure of US-China trade negotiations.
Morningstar data shows that Greater China and Asia ex Japan equity markets, as well as global emerging market equities in general, have already enjoyed net inflows during the first four months of 2019.
However, both sentiment and flows data indicate that there is not yet a clear consensus among fund selectors about whether fully to allocate to risk-assets.
The ambivalence is most obvious in attitude to cash allocations. Nearly half of Singapore respondents to the survey expect to reduce their cash levels over the next 12 months, but in Hong Kong and Thailand around four in 10 intend to add to their cash holdings.
Moreover, fund buyers remain keen on G3 -currency Asian bonds, but deserted the region’s domestic currency markets in the second quarter of this year, despite the prospect of lower US interest rates, which should support local foreign exchange rates against the dollar.
This was in sharp contrast with the findings of last quarter’s survey, when there was a 30% positive shift in attitude towards Asian local currency bonds.
Elsewhere, in line with pan-European sentiment, the least-liked asset classes are European equities (again) and high-yield bonds, which tend to struggle when economic growth slows. US equities are looking healthier than prior quarters but are not overwhelmingly positive yet.
In contrast, absolute return and hedge strategies, private equity and unconstrained bonds have healthy demand among Asian fund selectors. If their stated preference converts into actual allocations, they might help reverse a trend that has seen eight consecutive monthly outflows from absolute return funds, and also losses from multi-asset funds.