Chinese investors favour equity over bonds as Fed balance sheet unwind sparks fears

Mainland investors are seeking exposure to equities, but without the volatility, according to Legg Mason survey

PUBLISHED : Wednesday, 08 November, 2017, 8:03am
UPDATED : Wednesday, 08 November, 2017, 9:11am

Chinese investors are likely to reposition their investments portfolios, seeking alternatives to fixed income products because of growing concerns over the US Federal Reserve’s reversal of its unprecedented monetary stimulus, according to US asset management firm Legg Mason.

Among investors, 35 per cent said they look for assets that provide higher income, such as income funds or dividend funds, according to a Legg Mason survey of 4,595 investors conducted in seven markets.

Just under a third of Chinese investors polled said their biggest concern was the coming end of quantitative easing, compared to 9 per cent which said the key concern was political instability globally.

“You can see the appetite of Chinese investors is changing. Now they want more stock exposure but without much volatility. They want to diversify into emerging markets too,” said Freeman Tsang, director of business development, head of China and Hong Kong, Legg Mason. The global firm manages US$754.4 billion in assets.

A sell-off in China’s bond market accelerated after the 19th Party Congress as banks cut their trading account positions because of expectations over rising US rates and worries for tighter Chinese regulation.

The Fed is paring down its US$4.5 trillion balance sheet by scaling back holdings of government and mortgage debt it amassed during three rounds of quantitative easing. Markets are also increasingly confident the Fed will hike interest rates in December, exerting upward pressure to market yields.

At the same time, Chinese policymakers have been tightening oversight of its young asset management industry to rein in financial risks.

Reflecting a worsening sentiment in the debt market, China’s 10-year government bond yield breached 3.9 per cent, a level that has not been seen since the end of 2014.

However, some analysts believe the sell-off is overdone, believing the market will stabilise at current levels for now.

Chinese investors are expected to keep channelling funds into debt and equity funds because of the rapid increase in retail investors’ wealth, sounder domestic equity and debt capital markets, and limits of the Chinese banking system to efficiently allocate national savings, according to Casey Quirk, an asset management consultancy of Deloitte Consulting.

The Chinese market has more than US$17 trillion in assets under management,

and is on track to become the second-largest asset management market globally by 2019, according to Casey Quirk.

Mainland investors will put about 10 per cent of their wealth into asset management products by 2030, up from only 4 per cent now, while US$8.5 trillion in new assets will flow into the asset management industry between 2017 and 2030, Casey Quirk said.