China slowdown and Paris attacks spur safe play by fund investors

Investors shift from equity funds to bond and diversified funds as risk appetite down

PUBLISHED : Sunday, 22 November, 2015, 12:00pm
UPDATED : Sunday, 22 November, 2015, 12:00pm

China economic slowdown, the likely US interest rate rise next month and the threat of attacks after terrorists struck Paris has prompted investors to shift from equity funds to bond funds or other safer investment options, according to fund managers.

Bruno Lee Kam-wing, Asia head of wealth and asset management of Manulife, said the terrorist attacks in Paris this month would not discourage fund managers to veer away from euro or European stock markets immediately but the longer term impact on the economy may affect the fund industry next year.

“The terrorist attacks may cause France and other European countries to review their refugee policies to prevent terrorists pretending to be refugees from entering their countries. This may force some refugees to remain in Greece, Italy or Turkey,” he said.

“This would hurt the economic outlook of these countries with many refugees. In addition, the threat may affect tourism and consumption and lead to a slow down in the economic recovery pace in Europe.”

Islamist militants killed 132 people in Paris and injured hundreds, as Paris declared a state of emergency and territories such as Hong Kong warned people from travelling to the French capital unless necessary.

Lee said other critical factors punters would need to carefully consider in the investment outlook are the latest five year plan of China which set economic growth at 6.5 per cent for the next five years, down from 8 per cent in the previous five years, and the rising chance the US Fed would raise interest rates next month for the first time in a decade.

“All of these factors would lead investors to become more cautious in the following month,” Lee said.

“Bond funds, high yield stock funds and dynamic funds which invest in a mixture of stocks and bond assets to diversify the risks level, would be popular for investors next year as their risk appetite is reduced.”

Lee said investors have become more cautious since September.

Investors are avoiding risky fund products, especially after turmoil hit the Chinese stock market turmoil with both the Shanghai and Shenzhen markets losing 30 per cent while Hong Kong ‘s Hang Seng Index fell 20 per cent in the third quarter, the worst since 2011.

But not everything is so dire.

Lee said a raise by the US Fed of rates would remove the uncertainties plaguing the market. This would benefit the US dollar and promote stability in the bond markets, with the Chinese yuan seen staying weak as a result.

He believes the yuan is going to be added to the (SDR) reserve currency basket of the International Monetary Fund when it meets on the issue at the end of the month.

“Adding the yuan into the IMF SDR will be a big boost to the international status of the yuan, which is set to help to encourage more fund houses to introduce yuan bond funds or other yuan denominated investment products,” Lee said.

Heng Koon-how, a senior foreign exchange strategist at Credit Suisse, said after the yuan is added to the SDR basket, the currency would remain stable in the near term at 6.40 against the US dollar, but would further weaken to 6.60 in the next 12 months.