Investors in Asia have shown cautious optimism in returning to the market, with net inflows in H1 2024 across all asset class fund categories more than 1.5 times the total recorded in all of 2023, according to a recent report.

Capital flows have been dominated by rising allocations to fixed-income funds as portfolio stability and income remain top of mind for investors, finds the latest fund flow data report from Calastone, the largest funds network in Asia.

As well, Asia’s economic outlook has improved in 2024, with growth projections revised upwards to 4.5% in 2024, according to the IMF, and inflation slowly moderating.

However, while the outlook is positive, Calastone cautions, material risks remain as the investors continue to navigate the ongoing turbulence of geopolitical uncertainty, supply-chain disruptions, property market defaults and slowing demand for critical commodities.

Investors eye rate cuts

Investor interest in fixed income has remained strong throughout H1 2024 as investors have sought to lock in yields and weigh bets for the timing of interest rate normalization from central banks around the world, including the US Federal Reserve.

Capital inflows from investors in Asia saw accelerated momentum in the first half of the year, the Calastone report notes, with investments into fixed-income strategies totalling US$3.3 billion on a net inflow basis. This is in sharp contrast to the modest net inflow of US$1.7 billion recorded in H1 2023.

January and February stood out with the highest volume of net inflows this year (totalling US$1.8 billion), coinciding with the two largest months of outflows from equity funds. The shift in investor behaviour, the report argues, points towards continued portfolio rebalancing in favour of stability and income in the current interest rate and market environment.

Looking closer at the data, the rest of the period, the report adds, saw more moderate inflows, averaging US$392 million per month, as widely held expectations for an impending rate cut got pushed out later into H2 2024.

Source: Calastone

Net buying of equity funds returns

The first quarter of 2024 started the year off on a challenging note for equity funds, with net outflows totalling US$439.7 million, the report details, continuing a trend of net redemptions and risk-off positioning by investors in Asia that started in April 2023.

However, May and June recorded the first months of net inflows for fund managers in more than 12 months, which could be explained by growing optimism around a near-term interest rate cut, as well as growing expectations of a soft landing for the global economy into 2025.

Mixed asset funds show resilience

Funds with a mixed asset strategy recorded steady inflows during the first half of 2024, with subscriptions from investors amounting to US$444.81 million on a net inflow basis. Most notably, investors slowly increased contributions to these strategies into April, the report reveals, likely in anticipation of a mid-year Fed rate cut, before paring back some of this enthusiasm in the later part of Q2 2024.

While there are some variations in the pace of investment activity as sentiments wax and wane with the economic cycle, Calastone suggests, it is important to highlight the relative stability of investment inflows for this fund category.

The central role these funds play in regular retirement and savings plans for individuals means, the report shares, contributions are not often used to speculate on short-term market outlooks. In fact, despite ongoing uncertainty, these strategies have consistently drawn inflows from investors over the last year and a half, with only three months where redemptions exceeded subscriptions.

“Analysing real-time transaction data on our platform shows investors in the region still have a strong preference for opportunities that can help insulate their portfolios from market shocks and uncertainty,” states Justin Christopher, Calastone’s head of Asia, commenting on the shift towards fixed income. “In the current environment, fixed-income fund managers have been a clear beneficiary of capital flows over the last 18 months, but we are starting to see flows broaden out back into equities as the ‘fear of missing out’ grows with global stocks grinding higher.”