Institutional investors to increase EM exposure
Institutional investors, both in Asia and globally, are planning to increase allocations to emerging markets (EM), however a bigger shift is expected to take place in the long-term rather than the next 12 months.
According to the survey conducted by Vontobel Asset Management, 57% of APAC respondents said they would expect higher EM allocations over the next five years compared to only 20% of respondents who had such plans within the next few months.
However, the drivers behind such a decision were varied and depended on the region where the investors were based.
For example, nearly half of APAC investors named declining volatility across the EMs region as one of their top two reasons and this was followed by a further 41% of those who expected rebalancing of global investment indices towards EMs to be equally important.
By contrast, the COVID-19 pandemic was less of a concern for APAC investors, with only 23% of them considering a reduction in EM allocations over the next 12 months, compared to 35% and 29% in Europe and North America, respectively.
According to Vontobel’s chief investment officer, Matthew Benkendorf, this was due to the fact that APAC investors had already seen developing economies, such as China, fare better than some developed markets.
“The virus could actually lead to increased allocations, because it challenges the conventional view that what is a problem in developed markets is a crisis in the emerging world. COVID-19 didn't cause disproportionately more damage in some emerging markets,” he said.
At the same time, over half of the Asian investors (53%) admitted China was too big to be accommodated in a broad exposure to emerging markets and investors should consider it as a standalone asset class or market. This rate was significantly higher than that in North America (42%) and Europe (37%).
Finally, 36% of APAC investors said they would employ mostly or entirely active strategies should they increase exposure to EM equities.
This was a significantly higher rate than that who said they would employ passive strategies (23%) as most believed buying the index would make it much more difficult to use the risk mitigation strategies.
“In emerging markets, where you have a generally less-developed set of economies and companies, you have an index construct that is lopsided in many ways. The index is a less optimal way to buy the really great companies that will compound long-term wealth with the lowest relative risk,” Benkendorf explained.
As far as the asset classes were concerned, APAC investors were looking beyond equities and fixed income and were more inclined to diversify their EM portfolio, as 67% of them said they would increase allocations in other assets such as infrastructure and real estate in the next three to five years, while American investors (52%) and European investors (42%) were less inclined to do so.
Vontobel surveyed 300 institutional investors and discretionary wealth managers globally in Europe, North America and Asia-Pacific in the second quarter of 2020.
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