Flows to debt, especially credit, to soar

AsianInvestor and Clifford Chance’s annual survey of regional industry executives finds expectations that Asian investments will diversify away from public equities.

The survey received 160 responses primarily from regionally located business and sales executives among asset management firms, as well as from some asset owners and distributors of investment products.

Like last year, industry participants expect the lion’s share of Asia-focused allocations to go to the region’s equity capital markets. But whereas last year Asian public equities were the consensus destination, other assets are now winning favour.

Last year 65% of respondents named equity capital markets one of their top-three expected destinations, virtually unchanged from 2010, when 64% voted the same way. But this year, only 41% of respondents put equities among their top three picks.

The percentage of votes for debt capital markets is unchanged year on year, at 34%, but has soared for private equity (32% of voters’ top-three picks this year, up from 20% in 2010), managed accounts (28%, up from 18%), distressed/opportunity funds (11%, up from 6%), and credit/financing funds (11%, up from 7%).

Mark Shipman, partner and global head of investment management sector at Clifford Chance, says: “The gap between equity and debt has closed,” noting the 41% who voted public equities among their top-three picks is now much closer to the 34% who chose debt capital markets, whereas a year ago the gulf was much wider. "This is a reflection of investors backing away from equities and looking elsewhere for less volatile returns."

“Credit is also doing well vis-à-vis equity,” he says.

The survey also asked the industry the geographies expected to receive the biggest capital inflows over the next 12 months. Last year China/Hong Kong came out top but this year it has fallen to second place, with 54% of voters putting it among their top-three picks.

Asia ex-Japan came top with 58%. So Asia is still seen as a massive destination for global capital, at least among industry executives located here, but it’s more about the broader region and less about China.

“It seems investors have cooled a little towards China,” Clifford Chance partner Matt Feldmann says. “Which is not unhealthy in the pursuit of a more balanced approach.”

Similarly, votes for Southeast Asia rose to 34% of voters’ top-three destinations, double the 17% it won a year ago. North America retained its bronze position.

We also asked the industry what asset classes will receive the most allocations from Asian institutional investors. The same question asked a year ago saw 41% vote for global equities. This year, expectations for that asset class have plummeted to 28% of votes (with participants asked to select the top-three asset classes).

This year global emerging-market debt has come top, with 34%, and investment-grade credit and high-yield debt also doing well (31%, versus 16% last year for credit; 24% versus 17% last year for high yield), and steady performance for global fixed income and global emerging-market equities.

“Investors are diverting funds into safe havens, which means there are tough expectations for equities in the next few years,” Shipman notes.

Feldmann adds: “Even real estate assets are down this year, because property prices have been too volatile [26% this year, down from 32%]. Investors want low-volatility returns from assets with stable fundamentals.” That is pointing them towards high-yield, emerging-market debt and investment-grade bonds.

The full results of the survey appear in the July edition of AsianInvestor magazine.