Asian Fund Industry Set for Revival After a Challenging Year
February 2, 2023 — Singapore
Fixed income taking center stage; selective risk appetite returning in equity
With fundraising challenged across most regional markets last year, Asian mutual funds saw net inflows drop 49.4% from US$567.1 billion in 2021 to US$286.8 billion year-to-date in November 2022. Although markets like Australia, Japan, and China managed to receive net flows in January-November—albeit at a reduced pace—most other markets bled, led by Korea with US$10.8 billion in outflows.
While all asset classes witnessed decreases in net inflows across the region, balanced or multi-asset funds suffered the biggest declines with net outflows of US$23.7 billion compared to net inflows of US$138.4 billion in 2021. This followed subdued performances on both the equity and fixed-income fronts. China-domiciled funds were responsible for most of these outflows, as weak economic indicators pointed towards China recording its lowest GDP growth in decades last year.
Amid risk-off sentiments, equity funds were not spared either, with Australia, China, Taiwan, Hong Kong, and Singapore suffering double-digit decreases in assets under management, as investor confidence remained low. However, lower equity valuations caused by prolonged weak market sentiments have created many value opportunities in growth sectors. Cerulli’s research indicates risk appetite growing in the region, albeit in the initial stages and in favor of Chinese equities.
Fixed-income funds were responsible for much of the outflows in the region in the second and third quarters of 2022, with Korea, Taiwan, India, Hong Kong, and Singapore registering net outflows, while China chiefly drove net inflows. Total net inflows into fixed income plunged from US$146.3 billion in 2021 to US$81.6 billion. Funds focusing on long-term bonds or those maturing in 10 years or more were hit hardest, being more sensitive to changes in interest rates.
As inflation cools and central banks look likely to slow their pace of rate hikes, Cerulli expects some form of stability to return to interest rates. Managers in the region have been emphasizing the promotion of fixed-income products as they see signs of inflation peaking and offering attractive opportunities to lock in high yields and meet Asian investors' income needs. Higher interest rates have made fixed-income products more attractive this year compared to last year, and against the backdrop of persistent elevated rates.
“As Asian investors look for products to enhance their yields, Cerulli sees fixed-income funds back on the center stage,” said Justin Lee, associate analyst. “Managers should consider promoting medium-duration investment-grade fixed-income exposure to investors, amid the weaker economic outlook and the looming possibility of a recession. Sectoral funds also continue to stay relevant in product promotion as prudent investors will cherry pick sectors that are expected to continue to grow in 2023 and beyond.”
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