The new year has arrived and times are changing. There is less gloom about the euro zone, the United States steered clear of its fiscal cliff and the mainland economy seems to be spluttering back into shape. This has implications for investors. While 2012 was about a defensive mode, with a record volume of bond funds sold in Hong Kong, 2013 looks like it will be a more upbeat, equities-focused year.
Likewise, investors last year converged on the most defensive currency, US dollars, and this year they look set to venture back into yuan. In that vein, Money Post surveys the advisory community to see what investment instruments are likely to be pitched to the public this year.
Mainland-listed, yuan-denominated stocks (A-shares) are getting more attention.
The view among advisers is the US and Hong Kong markets got a big bounce in 2012, rising 7 per cent and 23 per cent respectively, and the mainland market is catching up.
"The A-share market stands out globally as having been left behind in last year's rally. Investors are seeking access to the A-share market," says Gary Dugan, chief investment officer, Asia and Middle East, at Coutts, a private bank.
The mainland market was one of the worst performing in 2012 but it has been picking up. The CSI 300 Index, an A-share benchmark, rose 17.9 per cent in December.
International investors typically buy A-shares through exchange-traded funds (ETFs).
Marco Montanari, head of Deutsche Bank ETFs and db-X funds in Asia, says he is seeing strong interest from European investors in A-share ETFs. "We are seeing a lot more interest in equity markets and China is driving most of this interest," he says. "Growth in China is coming from non-Asian investors with potentially large wallets."
Deutsche listed its first A-share ETF in Europe in the second half of 2012 and, in the last quarter of 2012, it was the bank's most successful ETF in terms of inflows.
The other big product trend in 2013 is physically backed ETFs: funds that directly own the securities they aim to track. Liberalisations in 2012 meant Hongkongers could buy physically backed A-share ETFs for the first time.
The instrument was launched into a bad A-share market and competed against established synthetic A-share ETFs, such as the iShares FTSE A50 China Index, Hong Kong's biggest ETF by assets.
But the physical funds are catching on, partly because they are seen as simpler and cheaper than their synthetic equivalents. Four asset management houses have sold about 40 billion yuan (HK$50 billion) of these A-share ETFs to the Hong Kong market.
Four more fund managers have applied for approval from the Securities and Futures Commission to launch physical A-share ETFs. One industry insider estimates the new funds will be launched in the first quarter of 2013, raising another 40 billion yuan in Hong Kong.
Investors globally are catching onto the differences between physical and synthetic ETFs. Fund providers that once only offered synthetic funds now offer both, if only to give investors a choice.
Deutsche Bank in December listed its first physical ETFs, in Europe. The funds track equity markets in the euro zone, Germany and Britain. The bank also wants to list physical funds in Hong Kong, probably to track local markets.
Lyxor, an asset manager, also in December listed its first physical ETFs on the NYSE Euronext Paris, confirming the global nature of this trend. "Some investors prefer that the fund physically own the underlying [asset]. The regulators are saying that if you are using derivatives, you need to have enhanced disclosure of the risks to investors. So some people are saying that if there are all these risks in synthetic ETFs, maybe it's better to get physical," says Lok Yim, Deutsche Bank's head of private wealth management for North Asia.
The big fund management houses are looking to launch yuan versions of some of their flagship funds. "Most of the household fund names are applying for SFC permission to create yuan currency classes of their flagship funds," says Alfred Mak, an investment products specialist at the Bank of East Asia.
Private banks are already selling the instrument to their clients, as they need no special approval to do so. These funds will invest in a wide range of international assets. The fund houses will use currency derivatives to link the return of these international assets to the yuan. Essentially, investors buy a fund plus a currency swap.
This might make intuitive sense. Many Hongkongers hold yuan on deposit, for which they get scant interest income. Likewise, dim sum bonds (yuan bonds sold in Hong Kong) generally pay low yields. High yield US bonds funds can generate a much higher nominal yield and, if they are yuan, then the investor also gets the potential currency appreciation. Conceptually, it's a higher-yielding yuan fund.
However, investors might want to ask themselves why they would go through the complication of investing in such an instrument, when they can separately get yuan exposure and the US bond fund.
"For private banking clients, it doesn't make as much sense. You can [just own] yuan. You don't have to buy the fund just because it's referenced in yuan. You can just buy the underlying currency," says Yim.
"We see demand from clients but that demand is not overwhelming," says Andrew Williamson, head of investment strategies and advisory products, APAC, UBS Wealth Management, about these yuan spin-off funds.
Investors can expect a lot more equity-themed products in 2013. That is partly because last year was so debt focused. Only one-fifth of the SFC approved funds launched to public investors in 2012 were explicitly equity focused. Most of the rest were debt themed.
Advisers expect a lot more equity funds to be launched this year. If the recent rally continues, people will start venturing away from index funds (such as ETFs) to look more at actively managed funds with a specialist focus.
"We started 2012 with a number of concerns, political and fundamental. In Europe we had the sovereign debt crisis, in China there was concern whether the economy would hard or soft land. But we've muddled through those issues and that has given investors confidence," says Williamson.
"According to most forecasts it should be a decent year for risk assets," says Adam Tejpaul, head of investments of J.P. Morgan Private Bank Asia, referring to equities.
But here is the big caveat. All of this could reverse at any moment. Remember that share markets caught a big rally at the start of 2012, only to get waylaid in May through September by an outbreak of the euro-zone crisis.
Moreover, the fund industry is like a giant tanker ship. It takes a long time to change course, as it takes many months to set up funds and then get SFC approval. Which means that bond funds will continue to dominate product launches well into the first half.
Moreover, advisers say there is still demand for bond funds, particularly the high-yield variety, and will keep selling this. "We see very high demand for yield enhancement, which equals bonds," says Williamson.
So, a more accurate answer to the question posed at the beginning - what will banks and advisers be selling investors in 2013? - is, well, everything.