Europe's sun rises as favoured fund target

PUBLISHED : Friday, 26 December, 1997, 12:00am
UPDATED : Friday, 26 December, 1997, 12:00am

Prospects for Asia have never looked bleaker, and recent downgrades of South Korean, Thai, Indonesian and Malaysian debt could not have come at a more inopportune time.

The world's fund managers are deciding on asset allocation strategies for the year ahead and Asia is far down on the list of priorities.

Not only does the region represent an area of diminishing interest among institutional investors, but its demise as a destination for capital comes as markets elsewhere, particularly in Europe, are showing promise.

After being the beneficiary of sluggish markets in Europe and the United States in the early 1990s, roles are reversed, and this could have serious consequences for the region.

Investment analysts have remarked since the dramatic collapse of many stock markets in October on how a strong tolerance of risk among investors was immediately transformed into risk aversion.

Such a mood is likely to prevail for at least the next two quarters.

Risk aversion coupled with bullish growth prospects for Europe would be enough for investors to look elsewhere. An added encouragement to investors will be the cultural affinity that US and European investors will have with the growth markets of 1998, as those markets will be in their own backyards.

Investors will have a clearer understanding of the economies they are dealing with, the soundness of banking systems and the style of individual business practices.

This may make a welcome change from having to come to grips with more unfamiliar investment environments, and dealing with inexact sciences such as the notion of guanxi in red chips.

Fund exposure to equities in Asia ex-Japan is falling, with estimates that it is down from 10.5 per cent of portfolios in January, to 6.6 per cent in December. For Japan, holdings are down from 18.9 per cent to 13.5 per cent.

The extent of risk aversion is highlighted by a straw poll on asset-allocation strategies, which reveals a rise in cash assets from 3.6 per cent in January to 6.3 per cent in December.

Continental Europe has seen a rise in asset allocation to 26 per cent, up from 24.4 per cent at the beginning of the year, while US weightings have risen to 30.8 per cent, from 28 per cent in January.

The shift from Asia to more developed markets is clearly exhibited in these figures, but the picture is still far from clear for emerging markets outside Asia.

Latin America started the year with a weighting of 3.5 per cent but slipped to 3.2 per cent by December from a July high of 7.7 per cent, according to consensus estimates.

In non-core Europe, that is eastern European countries and European Union countries outside Germany, France and Britain, the picture is more defined, with weightings moving from 14.2 per cent at the beginning of the year, to 17.5 per cent.

The breadth of this asset class, however, makes any specific emerging market trend difficult to define.

Another pointer to trends is the widely watched International Finance Corp indices, which analyse only emerging markets. Asia's market weightings in the IFCI Composite have been pushed down to 26 per cent, favouring Latin America at 40 per cent, and Eastern Europe, the Middle East and Africa at 34 per cent.

Some say that all this bearishness against Asia is overdone, and that the point of maximum pessimism has probably passed.

All the selling has taken place, and that the bottom, particularly in equities, has probably been reached.

Some brokers say there is a build-up of mergers and acquisitions activity in emerging markets, as firms join together to survive and cheap companies become available, indicating the prospects for a considerable market upside.

It is an argument that could gain some currency, but it is more probable that any return of confidence in Asia will have to be underpinned by convincing economic and structural fundamentals. In the meantime, investors will be looking elsewhere.