Foreign fund flows have buoyed Asian markets in recent years. Is it time for Asia to return the favour?, asks Lex.
Asian pots of money are overflowing. The region boasts some of the world’s thriftiest savers, biggest piles of foreign exchange reserves and fastest-growing mutual fund industries. Citigroup calculates that there is $3,400bn of bank deposits in emerging Asia – roughly equivalent to the region’s GDP, Lex notes.
To add detail to a separate report on “Add in China and the figure swells to $7,800bn. Now savers and money managers are waking up to idea that stashing money in banks isn’t smart: hence, for example, China’s runaway equity market. Central banks are following Singapore’s lead and channelling portions of foreign exchange reserves into racier assets.”
Elsewhere in the region, pension fund managers are also readjusting portfolios, having been burned by compressed bond yields. South Korea has already diverted around $1bn of its $200bn national pension fund into private equity funds and plans to whittle back fixed-income holdings further. Taiwan’s new pension fund has been temporarily mothballed but should be farmed out to managers later this year. Investment of other cash piles will gradually follow suit, including some $135bn in post office savings.
Asian investors’ growing comfort with non-cash assets is demonstrated by the growth of mutual funds – which in turn are switching bigger allocations overseas. Take South Korea, where the onshore fund industry has swollen from $165bn in 2001 to $260bn today, says Lex. At the same time, overseas investments have now doubled from 6 per cent last year, according to Korea Fund Ratings. This month’s abolition of capital gains tax on onshore funds that invest in overseas securities suggests the trend will continue.
In Malaysia, assets under management rose 22 per cent last year to $50bn while funds invested overseas jumped from 3 per cent in 2005 to 8.5 per cent last year. Current numbers are far too small to drive, say, a rally on Wall Street. “But Asian markets should certainly be more self-sufficient next time foreign flows of hot money turn cold,” concludes Lex.
But before we hail Asia’s golden era, don’t forget that not much more than two months ago, the same white-hot markets suffered as part of a global sell-off, initially sparked by a 9 per cent plunge in China’s mainland stock market, the FT noted in a separate report earlier this month.
“Valuations are becoming stretched again and insufficient risk is priced into the market,” Garry Evans, Asia-Pacific equity strategist at HSBC in Hong Kong, told the FT. Adrian Mowat, chief Asian and emerging markets equity strategist at JPMorgan, says that inflationary pressures across the region are a potential cause for worry.
“We should be more concerned about inflation, not growth. After a number of years of strong economic growth, capacity constraints are emerging…These combined with higher energy and more recently food prices may result in higher interest rates.”
More important, the FT notes, “the picture across the region is not uniform.” There are differences of opinion about the relative outlook for individual markets and drivers specific to each.