Asian Institutions Seek Portfolio Rebalancing Amid Inflationary Pressures

November 1, 2022 — Singapore

While portfolios have been relatively sheltered from the war in Ukraine, inflationary risk is a top concern

Asian institutional investor demands are changing in the new inflationary environment. Despite the risk aversion seen in the first half of 2022, mandate activities are emerging in the second half as asset owners take advantage of attractive valuations to rebalance portfolios, according to Cerulli’s latest report, Institutional Asset Management in Asia 2022: Opportunities in a Changing Landscape.

Institutional assets in Asia ex-Japan had one of the best performances in 2021, growing by 6.3% in 2021 to reach US$21.2 trillion. This was propelled by strong global equity market performance and organic asset growth. The biggest contribution was from investable retirement assets, which grew 11.8% year-on-year to US$5.1 trillion, boosted by increasing inflows from members as well as strong performance of existing assets.

However, Asian institutional investor demands continue to evolve with rising inflation in 2022. Although their institutional portfolios have been relatively sheltered from the impact of the Russia-Ukraine war, compared to their European counterparts, Asian economies are still undergoing inflationary pressures, as most are net importers of oil and gas. The long-term goal of increasing asset allocation to risky assets is still on the agenda, but short-term risk aversions took effect to curb appetites for such assets in the first half of 2022.

However, in the second half of 2022, Cerulli notes increased mandate activities emerging as Asian portfolios looking to revert to strategic asset allocations with year-end portfolio reviews approaching. Despite their risk aversion, there is pent-up demand from asset owners looking for new entry points in both traditional and alternative assets, according to the research. For example, with global equity markets down almost 30% in the year to September 2022, most institutional investors have the opportunity to add equity positions back to their portfolios. Given the current attractive equity valuations and depreciated local currencies against the U.S. dollar in most Asian markets, top-ups are being made mainly in the domestic equity space. Fixed-income allocations in the domestic space have also been added in countries that have been raising interest rates in line with U.S. Federal Reserve hike.

The broad consensus among asset owners is that there is a lot of dry powder in the region. With the resurgence of business travel in Asia and increased on-site due diligence activities, Cerulli anticipates better visibility of investment pipeline by asset owners in 2023.

“Despite concerns among asset owners for new investment allocations in the current market environment, there is an ongoing need for external manager expertise in multiple areas of investment on the back of growing assets,” said Soo Ah Ran Cho, associate director with Cerulli. “On the back of increasing assets, diversification needs are becoming more acute in Asian institutional portfolios. As Asian institutional portfolios still have high allocations to local debts, the need for foreign partnerships and investment into overseas assets are expected to increase in the coming years.”

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