Asian mutual funds face brighter prospects this year after a challenging 2022. As inflation cools and central banks are likely to slow the pace of rate hikes, stability is expected to return to interest rates, Cerulli Associates says.
Net inflows into the region’s fund industry dropped almost by half to US$286.8 billion in the year to November 2022, compared with the same period in the previous year.
Although markets like Australia, Japan, and China managed to receive net flows in January-November – albeit at a slower pace – most other markets bled, led by Korea with US$10.8 billion in outflows.
While all asset classes saw 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, according to Cerulli.
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 says risk appetite appears to be growing in the region, although still in the initial stages and in favour 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.
But with signs of inflation peaking, fund managers in the region see attractive opportunities in fixed-income products to lock in high yields and meet 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, according to the market research and consulting firm.
“As Asian investors look for products to enhance their yields, Cerulli sees fixed-income funds back on the center stage,” says associate analyst Justin Lee. “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.”