More funds to flow into emerging markets

PUBLISHED : Tuesday, 14 September, 2010, 12:00am
UPDATED : Tuesday, 14 September, 2010, 12:00am

Fund managers have a more optimistic view on equities for the third quarter than they had for the second as improved corporate earnings and low bond yields have prompted them to turn to riskier assets, according to a report by HSBC.

Half of the fund managers surveyed in the quarterly report said they would increase their equity portfolio in the third quarter, compared with 40 per cent in the second quarter, according to the survey that polled 12 fund management houses that account for about 15 per cent of global funds under management.

Only 13 per cent of the managers said they would increase their exposure in bonds, versus 25 per cent in the previous survey. Half of the respondents hold a neutral position in cash, compared with 38 per cent previously.

Institutional investors are particularly interested in the equity markets in Asia-Pacific ex-Japan and emerging markets, with 44 per cent and 67 per cent of the managers holding an overweight position in the two respectively. Fifty per cent said they would increase their equity portfolios in the Greater China region (the mainland, Hong Kong, Macau and Taiwan), down from 71 per cent in the previous quarter. 'It's because the tightening policy in the property market and the potential interest rate hike risk in China has made investors diversify across Asia-Pacific,' Bruno Lee, HSBC's regional head of wealth management in Asia-Pacific, said.

Driven by policy risk concerns, Greater China equities recorded outflows of about US$625 million in the second quarter, a 4.8 per cent decline, the first outflow since the first quarter of 2009. The net outflow in Greater China made it the worst-performing market in the world in the last quarter, compared with a 2.5 per cent net increase in fund flow to the Asia-Pacific ex-Japan market, 2.5 per cent decrease in Europe and a 3.1 per cent drop in global equities.

Lee said: 'A pullback would occur in the equity market in Greater China in the second half as investors shift their focus to fundamentals such as corporate earnings.' The timing would depend on when individual investors begin to follow the lead of institutional investors vis-a-vis the equity market, according to him.

The commodities and the financial sectors would be the first to benefit from a rebound in the economy, followed by technology and machinery products as companies usually start investing in fixed assets after a pick-up in demand, Lee added.

The outlook for bonds is less favourable than equity owing to the rally in bond prices in the past 18 months and declining yields. But Asian bonds and high-yield bonds continued to be popular among institutional investors, with 57 per cent and 63 per cent of the respondents holding an overweight view on them respectively in the third quarter.