Asian fund managers are receiving mixed signals as they close out the year and look for clues to where demand is likely to focus in 2014.
In a year that has seen good progress in most mutual fund markets, new business flows have been influenced by central bank policy, with the region adjusting to changing expectations over continued US monetary stimulus.
Fears that this stimulus would be tapered began to surface in late May, and this has affected international fund flows to emerging markets. At the same time, as money pulled back from Asia’s rapidly growing bond markets, investors have been worried that falling exchange rates and a fall in liquidity would cause retail investors to withdraw from the region’s bond markets at a critical time. Fund managers will need to stay flexible and be sensitive to changing conditions through the early stages of next year.
It is evident that Asian investors cannot be accused of being slow to react to changing investment conditions. In late May, when Ben Bernanke, the US Federal Reserve chairman, first mentioned the prospect of tapering Fed bond purchases, retail investors in a number of Asian markets took immediate action and began to rebalance their portfolio of mutual funds.
Bond funds, and in particular high-yield bond funds, were the immediate subject of such rebalancing as previous strong subscriptions reversed. Low bank deposit rates and a lack of confidence in regional equity markets had caused investors to crowd in to higher-yielding bond funds until May, many paying regular income, either monthly or quarterly.
In June, Taiwanese investors were net sellers and pulled more than $890m from high-yield bond funds, about 15 per cent of the total amount invested in the asset class. In Hong Kong, investor behaviour was similar although the sale of mutual funds investing in bonds was spread out over a number of categories. In the third quarter, net sales came to more than $2.8bn in Hong Kong for all bond funds including global, Asian and emerging market strategies. By comparison, the bond fund outflow in Singapore was a more modest $245m.
The fear in Asia had been that significant retail selling in the region’s bond markets would affect underlying liquidity and disrupt the region’s rapidly developing bond markets. This has not happened despite strong headwinds. At the same time, China’s faltering economy threatened to slow regional economic growth and exacerbate the situation.
Stability in the region’s bond markets has been confirmed in the latest Moody’s Investor Service outlook for next year. The rating agency reports that the outlook for Asian non-financial corporates is mostly stable across all countries and industries, with the exception of India. Significantly, 75 per cent of all corporate outlooks in Asia are stable, suggesting that bond markets have overcome the immediate challenge regarding speculation about a change in US monetary policy.
Moody’s reports that the refinancing risk is manageable. The vast majority of bonds maturing in 2014 is investment grade and only 7 per cent of next year’s maturities are speculative grade, representing a relatively modest $8bn. Stability in the region’s bond markets will help to reassure investors in higher-yielding mutual fund strategies.
Through the third quarter, as money had been withdrawn from bond funds, interest in equity funds revived. In Hong Kong there was more than $1.8bn in net sales from all equity strategies and $900m in Singapore. Taiwan recorded $261m in net sales for equity funds in October.
Appetite for equity funds among Asian retail investors is counter to the global trend towards emerging market funds. International investors have withdrawn money from emerging market funds for the six weeks to the start of December, according to EPFR Global.
Within Asia, a sustained rotation from bond funds to equity funds will depend on a number of factors. These include the pace of global growth, demand for Asian exports in developed economies and the strength of the Chinese economy amid continued financial reforms.
The recent announcement that the moratorium on initial public offerings in China is likely to be lifted could well provide the catalyst to support flows to equity fund strategies. The positive flow so far has been coincident with better-performing stock markets in the north of Asia including China, Hong Kong, Korea and Taiwan. Rather than label Asian retail investors as speculators or risk seekers, those closer to the region see local investors as quick to react to shifts in economic and investment trends.
Mark Konyn is chief executive of Cathay Conning Asset Management, based in Hong Kong
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