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Fund managers turn positive on Greater China equities

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Global fund managers are most optimistic about Greater China equities with 56% holding an overweight view in the first quarter of 2012 as they look to move away from cash to equities and bonds this quarter, according to HSBC’s latest Fund Managers’ Survey.

Over a tenth of fund managers shifted from neutral to overweight views towards Greater China equities in 1Q 2012, one of the worst performing asset classes last year that started to turn around in 4Q11. MSCI China and Hang Seng Index fell 18.2% and 17.3% in 2011, versus a 2.1% gain for Standard & Poor’s 500 in the U.S. and a 10.5% drop for MSCI Europe. The performance reversed in the last quarter as Chinese equities recovered by 8.1%.

Malik Sarwar, HSBC’s Head of Wealth Development, Group Wealth Management, says: “Greater China equities are trading at a price-to-earnings ratio of nearly 12 times for 2012. With an attractive valuation, Greater China equities may offer potential wealth opportunities. China’s recent monetary easing measures such as cutting the reserve ratio requirement also improved market sentiment. Investors expect further easing which will continue to support the Chinese equities market.”

As equity markets rebound, fund mangers are less bearish on equities with 50% and 30% of respondents holding neutral and overweight views, respectively (vs 20% and 30% in 4Q 2011). Only one-fifth (20%) of respondents hold an underweight view in 1Q 2012, dropping significantly from 50% in the previous quarter. Apart from Greater China equities, an increasing number of fund mangers favour emerging markets equities (55%) and Asia Pacific ex Japan equities (40%) this quarter, compared with 27% and 20% respectively in 4Q 2011.

Over four in ten (44%) fund managers favour bonds as an asset class (vs. 22% in 4Q 2011). As many companies have solid fundamentals and are supported by relatively strong Asian economies, the majority of respondents are bullish on Asian bonds (88%) and global emerging markets/high yield bonds (78%) while bearish on European bonds (89%).

More fund managers are underweight towards cash (44% this quarter, compared with 22% in 4Q 2011.

“While the survey shows a continued and increasing preference for bonds as investors look for yield in a prolonged low interest environment, fund managers are looking at riskier assets again on the back of improving economies, resilient corporate earnings and attractive valuations,” says Sarwar.

Funds under management (FUM) across the 13 of the world’s leading fund management houses2 polled reached USD3.81 trillion3 at the end of 4Q 2011, up by 3.7% from the previous quarter. Reflecting investors’ conservative outlook amidst a volatile market, money market funds contributed 36.2% of the increase in FUM.

The survey recorded a net outflow of USD42.2 billion for equity funds in 4Q 2011 as investor sentiment was dampened by the European debt crisis. As investors continued to search for safe havens, bonds fund recorded a net inflow of USD19.7 billion last quarter, particularly US bonds.

The majority of equity and bond funds recorded positive returns in Q4 2011. Greater China equities posted one of the largest rebound, becoming the second best performer in Q4 2011 (+8.1%) from being the worst performer (-25.2%) in Q3 2011. Emerging markets equities and Europe including UK equities also showed a strong turnaround from -22.6% to +4.4% and from -22.6% to +5.1% in Q3 2011 and Q4 2011 respectively.

Sarwar says: “This quarter, there are signs of improved investor outlook, with selective prospects in equities and bonds. In a dynamic market, retail investors should review their asset allocation strategies regularly and re-balance their portfolios to tap investment opportunities aligned with their risk appetite.”

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