BNP Paribas Investment Partners believe reforms will help reverse the recent heavy selling and outflow of money from the emerging markets (EMs) and investors should see this period as an opportunity to build a base ahead of a turnaround in the markets.
Its CIO for Asia Pacific Alex Ng (picture, left) said the economic fundamentals of Indonesia, China, India, Brazil and other alike EM economies, added together with the rising correlation among such markets and with develop markets, is a sign the EM asset class is set to outperform over the longer term.
“The overriding thing to look at on where the EMs are headed is dependent on the next phase of reforms undertaken and we now see critical policy points not coming up yet or how these reforms impact the economies. Once addressed, interest will return on reforms made,” said Ng at a seminar in Singapore at the end of last month.
The markets will see an inflows of funds once reforms instituted to strengthen markets and economies show result, he said. A regional survey of its clients revealed Asian investors remain optimistic that the region offers the best investment opportunities in the mid- to long-term with equities the preferred asset class.
Almost 75% of respondents believe the region will enjoy sustainable growth anchored by domestic consumption amid rising incomes, urbanisation and strong demographic profile to support the outlook for equity performance.
“The current investment mindset show a preference for equities in Asian market like Indonesia and China that are seen to present the best opportunities for the secondhalf of 2013 while the respondents were bearish on money market, commodities and fixed income products for the same period. Interestingly, Europe comes in second with investors showing interest in the companies there with a global perspective,” said Mark te Riele (picture, right), BNP’s head of marketing and distribution in Asia Pacific.
The most favoured market to invest over the next 12 months among the respondents in the survey is Indonesia.
While some of the measures announced by Indonesia such as the introduction of limit of foreign ownership in banks to 40%, have been seen as nationalistic, portfolio investors are optimistic the reforms underline a move to strengthen the economy’s competitiveness ahead of the single Asean economic community in 2015.
“Indonesia is a remarkable story because it has been overlooked for a very long time due to the bad press and natural disasters but it now is a democracy and consumption power house that accounts for 60%-70% of gross domestic product in a population of 250 million, rising wealth and rich in natural resources — all leading to a remarkable story in term of economic outlook and equity performance,” said te Riele.
Indonesia to expected to grow an average rate of 6% over the next five years, according to a BNP Paribas representative there.
Apart from Indonesia, 69% of respondent believe that allocation to Chinese asset should exceed 10% with some 47% of these people saying the figure should be between 10%-29% of total investments due to the size of China’s economy.
The survey revealed that Asian investors continue to have a home bias with their investing action and they have also become more risk aware and are not jumping into the markets in a big way, te Riele added.
From a wealth management industry perspective, the survey found a need to increase wealth products, trust in the industry and education of potential clients as key to raising the acceptance of wealth management products.
There was also a mindset change among the investors in the region with a lot more affinity to fixed income products in places like India and Indonesia as people become more risk aware. Investors also want a clear, more transparency and simple strategy of investment, te Riele said.
BNP Paribas, which manages US$660 billion (RM2.11 trillion) globally and some US$55 billion in the region, believes dividend investing as an asset class has been overlooked in Asia despite total returns from dividend accounts for 50% of total return over since 1999.
“This asset class has been overlooked in the past few years due to the misperception dividend stocks were as seen as old and not growing or lacked innovation etc. This couldn’t be further from the truth as 80% of Asian companies are paying dividends and 40% of these are paying a dividend of over 3%. This represents a significant opportunity for investors,” Mark Vanderkolk, BNP Paribas Asia-Pacific equity investment specialist, said.
BNP Paribas believes a core EM based portfolio should have low volatility assets from its Group of Seven markets, consisting of Indonesia, Brazil, China, India, Turkey, Russia and South Korea and allow manager to take active risk from a large selection of stocks to get better return instead of a straight MSCI index linked approach.
The survey sample size was about 100 respondents consisting of institutional investors, retail banks, insurance companies private banks, distributors of investment products from across Asian countries like Malaysia, India, China, Hong Kong, Korea, Indonesia, Singapore and Japan.