Smaller Asian markets come to the fore: Study

Senior investment executives from around the world are moving their bets to small Asian economies, having cashed in some of their chips from the larger emerging markets, according to RBC Capital Markets Survey.

The study engaged 461 senior executives from around the world who shared their outlook for the future of capital markets.

The dramatic swings in sentiment captured by the RBC survey illustrate the ongoing volatility and complexity of economies and financial markets, says Richard E. Talbot, co-head, of global research at RBC Capital Markets.

“Asset managers and investors need to be increasingly discriminating in their portfolio allocation, taking a more nuanced approach to investing, looking for alternative indicators and conducting appropriate analysis and risk management.”

The 108 asset management respondents expect growth over the next year to come from smaller Asian economies such as Hong Kong, Singapore and South Korea.

These economies, say nearly three-in-four respondents (73%), have better prospects for growth in the next year compared to 2010, followed by India (66%), China (65%) and Russia (51%). Less enthusiasm was voiced for Africa (44%), Europe (43%), North America (42%) and Japan (27%).

“Emerging markets have led global growth for the past several years, and asset managers around the world believe they will continue to do so,” said Marc Harris, co-head of global research, RBC Capital Markets.

“The emerging markets are more diversified than ever and are growing at different rates. Investors are recognizing the need to look beyond the four traditional emerging markets and are now looking to intra-regional differences in search for yield.”

Among the survey’s findings was a shift in asset allocation to adapt to the impact of the sovereign debt crisis in portfolios, a significant realignment of expectations from a similar survey conducted in May 2010.

Asset managers are optimistic about Asian equity markets, with 69% expecting a rally over the next year. There is more optimism about the performance of European equity markets (only 26 % expect the markets to fall) and the Euro (30% expect it to rise). The participants are more optimistic about seeing a reduction in inflation in their own countries over the coming year.

The survey reflected a significant scaling down of expectations of the U.S. equity markets (only 54% expect gains, versus 66% in the previous survey) and the dollar (53% expect it to fall, compared to 24% in the previous survey).

Like most market commentaries these days, this one is laden with such post-recession buzzwords as “cautiously optimistic”. The survey noted asset managers are cautiously optimistic about the sovereign debt issues affecting Europe. More than half expect their own government will not experience a funding shortfall during the next one to three budget cycles or will be able to easily finance the shortfall.

However, one-in-five (21%) remain concerned about their country’s debt capacity being already under pressure, 4% think it will come under pressure in the coming year, but the number jumps to 30% when the time horizon is stretched to three years.

Largely sheltered from such worries, the U.S. maintains its relative strength. More than three quarters (77%) expect the U.S. dollar to remain the dominant global reserve currency over the next three years; the number drops to 49% looking out five years. The US dollar is followed by the euro as most likely to be the reserve currency of choice (20%) while 12% expect the Chinese renminbi to dominate. Only 36% think there is a greater than 20% chance that oil will be priced in a currency other than dollars within the next three years.

The U.S. debt, however, didn’t enjoy the positive outlook reserved for the greenback. Seven-in-10 respondents say that foreign holders of U.S. debt will face losses over the next three years, owing largely to higher interest rates or a perceived weakening of credit quality. Although this concern is, to some extent, nullified by 69% participants who feel the U.S. can tolerate higher levels of debt than other countries without raising doubts about its solvency.