Relative to North Americans and Europeans, institutional investors in the Asia Pacific region were the most optimistic about emerging markets with 47 percent foreseeing lower volatility in the long-term, according to a Vontobel Asset Management survey.
The optimism in decreasing volatility amid rising geopolitical tensions and slow growth – one of the two main drivers for increasing emerging market (EM) allocations – contrasts with that of North America (31 percent) and Europe (25 percent). The other main driver (41 percent) is the anticipation of global index rebalancing in favor of EMs.
«Emerging markets continue to present [active] investors with growth opportunities that outweigh those of developed markets,» said Ulrich Behm, APAC CEO at Vontobel Asset Management. «Such exposure inherently carries a different set of risks, emphasizing the need for prudent risk management and high-quality allocation.»
57 percent of respondents expect to increase EM allocations over the next five years though just 20 percent intend to do so in the coming 12 months.
China: Too Big To… Be Part of an Index
The survey also highlighted views that China was too large a market to be simply part of broad EM exposure and that it warranted consideration as a standalone asset class. This was agreed by 53 percent in Asia, 42 percent in North American and 37 percent in Europe.
This could have real consequences for asset managers as it could help increase awareness about the breadth of the Chinese equity market – a factor that Andrew Cormie, head of global emerging market and regional Asian equities at Eastspring Investments said is often overlooked.
«We encourage people to take a ‘whole of China’ approach,» he said, highlighting a wide range of private-sector firms. «If you're going to give someone a China mandate, give them the ability to invest across the whole of China.»
More Diversification
Increasing allocations in EM for APAC investors are part of a broader trend of diversification, as agree by 67 percent of respondents. Areas of interest for increased allocations over the next three to five years, such as infrastructure and real estate, and this contrasts with American (52 percent) and European (42 percent) investors.
Vontobel believes that the trend will extend into fixed income where low yields will drive demand for EM bonds.
«For some time, we have had low yields in developed world markets such as the Swiss franc and the euro, but even in the US there’s now not much yield left,» said Luc D’hooge, Vontobel’s head of emerging markets bonds. «That should push investors toward emerging markets.»
ESG Catch Up
APAC investors are making more and more new additions to portfolios and in addition to diversification, the survey indicates increased willingness to adopt environmental, social and governance (ESG) factors when investing.
57 percent of respondents in the region said ESG factors would have great influence in their decisions for EM allocations, only slightly behind Europe (60 percent) and North America (59 percent).
The survey was co-published by Vontobel and Longitude, a Financial Times company, based on responses from 300 institutional investors and discretionary wealth managers across 18 countries in April and May this year.
