Commodities may have to fall for funds to return to Asia Pacific area
The fall in fund managers’ allocations to the Asia Pacific region is unlikely to be halted or reversed until commodity prices fall further, commentators say.
A study by Strategic Insight, a research consultancy, predicts that American and European fund managers’ net allocations to Asia will amount to about $10 billion (£6.2 billion) in 2011 - down 90% on almost $100 billion last year.
The bulk of this shift will come from changing allocations in emerging market portfolios. In 2010, more than half the $105 billion of net inflows to American and European emerging market funds was routed to Asia, but just $6 billion has gone to the region so far this year.
Data from the Investment Management Association supports these findings. British retail sales for the Asia- Pacific excluding Japan and the Japan sectors totalled £117m over the first five months of the year, compared with a combined £1.2 billion for all of 2010.
Gary Potter, a joint head of multi-manager at Thames River, describes the report as a “rear-view mirror survey”. He suggests the fall in net allocations could be because fund managers took some profit after the region’s relative success in the past two years.
He also suggests some managers expect western markets to perform “as well, if not better” than Asia in 2011, but he would not be surprised if allocations to Asia rose on the back of better than expected economic data from the region in the second half of 2011.
Potter adds that continuing commodity price inflation is making producing areas such as Russia and Latin America more attractive to investors than overall consumers such as China and India.
Robin McDonald, a co-manager of funds of funds at Cazenove, says investors’ enthusiasm for Asia can “swing quite violently” despite the region being a driver of global growth over the past decade.
As inflation has risen in the Asia Pacific region this year, stockmarkets have weakened. Fund managers may be reluctant to return in force until consumer prices, especially of food and energy, come under control, McDonald adds. “If the market were to believe that the peak was in for Chinese interest rates or that the government was going to start loosening policy … that would give the marginal investor the excuse to start buying this region again.”
Both managers lowered their funds’ exposure to Asia at the end of 2010. But they have differing outlooks. Potter argues that “commodities are relatively at a peak level” and has started to move back towards Asia. McDonald says there are not enough reasons to start buying in the region again.
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