Asian investors are suffering from a bout of déjà vu following the rout in the Asian region’s equity markets at the beginning of August.
Stock market turmoil caused by the effects of the concerns over the European sovereign debt crisis, the prolonged US budget discussions and the subsequent credit downgrade of the US caused the region’s markets to lose as much as 10 per cent of their value in the first week of August.
In much the same way Asia’s markets and investors were severely affected by the global financial crisis which did not begin in Asia, so it seems that the current crisis threatens to undermine investor confidence in Asia again.
The immediate response from China to the news that the US had lost its top-tier credit rating with Standard and Poor’s was a statement demanding that the US tighten its belt and confront its debt addiction, as reported by Xinhua, the government news agency.
China is the largest holder of US Treasuries with a reported $1.3bn-worth of securities held as part of its foreign exchange reserves. Other countries have been less critical and following an emergency meeting of senior South Korean officials the government affirmed its confidence in Treasuries.
Asia makes up about half of foreign-owned US debt, and institutions beyond central banks and sovereign wealth funds are watching developments very closely, although it is unlikely that portfolios or investment guidelines will be altered as a result of the downgrade.
For some time the Asian sovereign wealth funds have been diversifying away from developed economy government debt portfolios. Fund managers are concerned that plans to outsource assets may be delayed as institutions consider market conditions and the increased uncertainty and volatility.
Retail investors are the most nervous as can be judged by the immediate decline in markets including in Taiwan, South Korea, China and Hong Kong where individuals are highly active in their respective stock markets. In Taiwan, margin maintenance ratios declined as investors headed for the exits and investors waited for signs that the government stabilisation funds would enter the stock market, as was the case in South Korea. Despite Asian stock markets generally faring better in July compared with other regions, the sudden realisation of a potential double-dip recession in the US, compounded by sovereign debt worries, have hurt confidence.
Retail investor confidence has been bumping along the bottom since last year in China where a rampant property market has been the main focus for many investors and retail banks have been less keen to convert deposits to fund investments. According to reports in the Shanghai Daily, total fund assets fell by more than 9 per cent last year.
New fund launches this year have struggled to raise assets as retail banks, the main distribution channel for mutual funds in China, have focused less on selling funds and more on maintaining loan-to-deposit ratios. This has made an already crowded channel even more competitive, limiting the scope and scale of new launches. Funds have suffered continual outflows this year and cash levels have remained at around 10 per cent. At the same time turnover on the China A-share market itself has declined. Improving sentiment is a precursor of recovering mutual fund demand. This will require clear evidence that the current monetary and interest rate tightening cycle has peaked in China and that inflation has stabilised, coincident with a growing expectation that property prices are less attractive relative to the stock market – a set of circumstances that will take longer to materialise.
Mutual fund sales in Hong Kong have had a better time last year and this year ahead of the recent market turbulence.
The recent sell-off in stock markets is likely to impact upon sentiment in the near term as fund managers brace for redemptions. The longer-term trend for net sales in Hong Kong shows little positive development. For Hong Kong investors the allure of property has already peaked with new property developments finding less interest upon release.
At the same time, near-zero bank deposit rates limit the choice for investors who may start to balk at chancing exposure to foreign currencies – currency exposure has been a popular choice for investors. If longer-term interest rates do increase, we can expect structured investments that combine partial upside participation with capital protection to become more popular.
As investors across Asia assess the longer term implications of the US credit downgrade, it is likely to put more focus on currency diversification for institutions. Most recently, Taiwan’s Financial Supervisory Commission proposed that insurers could be permitted to invest up to 10 per cent of their overseas asset exposure in Hong Kong-listed renminbi-denominated stocks, bonds, equity funds and exchange traded funds.
Perhaps this is more evidence that the focus of attention is shifting away from the dollar and the US.
By Mark Konyn
Source: www.ft.com
Stock market turmoil caused by the effects of the concerns over the European sovereign debt crisis, the prolonged US budget discussions and the subsequent credit downgrade of the US caused the region’s markets to lose as much as 10 per cent of their value in the first week of August.
In much the same way Asia’s markets and investors were severely affected by the global financial crisis which did not begin in Asia, so it seems that the current crisis threatens to undermine investor confidence in Asia again.
The immediate response from China to the news that the US had lost its top-tier credit rating with Standard and Poor’s was a statement demanding that the US tighten its belt and confront its debt addiction, as reported by Xinhua, the government news agency.
China is the largest holder of US Treasuries with a reported $1.3bn-worth of securities held as part of its foreign exchange reserves. Other countries have been less critical and following an emergency meeting of senior South Korean officials the government affirmed its confidence in Treasuries.
Asia makes up about half of foreign-owned US debt, and institutions beyond central banks and sovereign wealth funds are watching developments very closely, although it is unlikely that portfolios or investment guidelines will be altered as a result of the downgrade.
For some time the Asian sovereign wealth funds have been diversifying away from developed economy government debt portfolios. Fund managers are concerned that plans to outsource assets may be delayed as institutions consider market conditions and the increased uncertainty and volatility.
Retail investors are the most nervous as can be judged by the immediate decline in markets including in Taiwan, South Korea, China and Hong Kong where individuals are highly active in their respective stock markets. In Taiwan, margin maintenance ratios declined as investors headed for the exits and investors waited for signs that the government stabilisation funds would enter the stock market, as was the case in South Korea. Despite Asian stock markets generally faring better in July compared with other regions, the sudden realisation of a potential double-dip recession in the US, compounded by sovereign debt worries, have hurt confidence.
Retail investor confidence has been bumping along the bottom since last year in China where a rampant property market has been the main focus for many investors and retail banks have been less keen to convert deposits to fund investments. According to reports in the Shanghai Daily, total fund assets fell by more than 9 per cent last year.
New fund launches this year have struggled to raise assets as retail banks, the main distribution channel for mutual funds in China, have focused less on selling funds and more on maintaining loan-to-deposit ratios. This has made an already crowded channel even more competitive, limiting the scope and scale of new launches. Funds have suffered continual outflows this year and cash levels have remained at around 10 per cent. At the same time turnover on the China A-share market itself has declined. Improving sentiment is a precursor of recovering mutual fund demand. This will require clear evidence that the current monetary and interest rate tightening cycle has peaked in China and that inflation has stabilised, coincident with a growing expectation that property prices are less attractive relative to the stock market – a set of circumstances that will take longer to materialise.
Mutual fund sales in Hong Kong have had a better time last year and this year ahead of the recent market turbulence.
The recent sell-off in stock markets is likely to impact upon sentiment in the near term as fund managers brace for redemptions. The longer-term trend for net sales in Hong Kong shows little positive development. For Hong Kong investors the allure of property has already peaked with new property developments finding less interest upon release.
At the same time, near-zero bank deposit rates limit the choice for investors who may start to balk at chancing exposure to foreign currencies – currency exposure has been a popular choice for investors. If longer-term interest rates do increase, we can expect structured investments that combine partial upside participation with capital protection to become more popular.
As investors across Asia assess the longer term implications of the US credit downgrade, it is likely to put more focus on currency diversification for institutions. Most recently, Taiwan’s Financial Supervisory Commission proposed that insurers could be permitted to invest up to 10 per cent of their overseas asset exposure in Hong Kong-listed renminbi-denominated stocks, bonds, equity funds and exchange traded funds.
Perhaps this is more evidence that the focus of attention is shifting away from the dollar and the US.
By Mark Konyn
Source: www.ft.com
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