It’s become risk-on in Asia as investors keep money home, go with more risk and avoid wobbly Europe.
It may be euro-mageddon or “pain in Spain,” Grexit or Spailout time in Europe but what it most certainly isn’t is “risk on.” Most MNC treasurers by now have likely moved their company’s assets away from the risks associated with Europe, or at least moved them from the periphery countries to the stronger northern ones.
And Asian institutions? It looks like they have decided to keep their cash is in Asia, where the European crisis, for now, is just a small puff of smoke on the horizon. And because of that disconnect with Europe, they’re getting risky with their money. According to Greenwich Associates, in the wake of the collapse of equity market valuations that occurred during the financial crisis, fixed-income investments made up 73 percent of Asian institutional portfolios. But that share decreased dramatically to 58 percent in 2012, Greenwich said. At the same time, portfolios have become riskier: equity allocations increased from 13 percent in 2010 to 22 percent in 2011 to 26 percent in 2012.
“From 2010 to 2012 Asian institutions’ average allocations to domestic equities increased from 5 percent of total assets to 10 percent, and allocations to international equities grew from 8 percent of assets to 16 percent,” according to Greenwich. Underlying these allocation decisions are extremely bullish expectations about future investment returns, says Greenwich reported. Asian institutions expect the rates of return on equities top other markets and expectations in other areas of the world “by a wide margin in nearly every major asset class.”
This likely won’t end anytime soon as China and other emerging markets will be the drivers of global growth for some time, what with a sluggish economies in the US and Europe, government inaction in both of those regions and record debt levels – all of which keeps the risk of another recession in view.
This has caused some Asia institutions to make riskier even the most conservative fixed-income portfolios. They are forgoing traditional global strategies “in favor of more focused and specialized approaches such as Asian fixed income, U.S. bonds, emerging market fixed income, corporate bonds, and high yield,” Greenwich said.
One worry that Greenwich notes, however, is that most Asia institutions manage their assets in-house. Greenwich said 80 percent of companies manage their own assets, vs. about 12 percent in the US. This means the in-house managers are going up against possibly more skilled asset managers whose sole focus is investing.