Asia investors boost China exposure, scale back on HK

Two new pieces of data show increased investor demand for Asian allocations.

Against the backdrop of a big reduction in eurozone exposure and rotation into Japan and emerging markets among global allocators, institutional investors have grown more bullish on China, says Bank of America Merrill Lynch (BoA Merrill). Total mutual fund flows, meanwhile, show strong demand for Japan and global emerging markets as investors flee Europe, according to EPFR Global.

Sentiment on global growth has improved, with a net 19% of respondents saying the global economy will strengthen in the next 12 months, according to BoA Merrill’s July survey of fund managers.

With regard to China, Asia-Pacific and emerging-market portfolio managers are now less concerned about the country’s growth prospects. A net 24% of respondents are predicting slower growth over the next 12 months, down from a net 40% in June.

That may explain why a net 35% of Asia-Pacific investors are now overweight China, up from around 18% in June. Taiwan exposure also got a boost, with around a net 16% of Asia-Pacific investors overweight the country, up from 8% in June.

Hong Kong, on the other hand, went from a net overweight of 25% among Asia-Pacific investors to a market-neutral position with a net 0% of respondents over- or underweight. Malaysia also suffered, going from a net neutral position among Asia investors to a net 12% being underweight.

Emerging-market investors are equally down on Malaysia, with a net 41% underweight the country – though that is admittedly an improvement on the 53% net underweight in June.

However, EM investors scaled back their China exposure (from a net 32% to net 18% overweight) and remain heavily (a net 52%) underweight Taiwan. They also went from being a net of around 12% overweight Thailand to a net 7% underweight.

As far as global mutual-fund flows are concerned, global emerging-market equity funds received their third weekly net inflow, boosted by institutional allocations, says EPFR. At the funds level, however, regional allocations were weak. The exception is Taiwan, where dedicated allocations boosted Asia ex-Japan equity funds despite redemptions from China equity funds.

Given the BoA Merrill survey shows Taiwan has been a big underweight for institutions, the EPFR data suggests this is moderating. The EPFR data also corresponds to BoA Merrill's survey showing EM investors stepping back somewhat from China exposure.

As for Japanese equities, the BoA Merrill survey shows global allocators went from a net 22% being underweight in June to a net 2% overweight this month.  Moreover, a net 76% of respondents to the Japanese regional survey expect corporate earnings to improve in the next 12 months, up from a net 54% in June.

This is in sync with EPFR's funds data, which shows flows to Japan equity funds climbed to their highest level since early 2006, as Japanese companies increased their capital expenditure forecasts and May's industrial production figures showed a gain of over 6% month-on-month. Japan funds took in a net $1.3 billion in the first three weeks of July, and nearly $3 billion year-to-date.

Globally, allocators boosted equity exposures and cut bond holdings, reports BoA Merrill. A net 35% of fund managers were overweight equities in July, up from a net 27% in June, while a net 45% were underweight bonds, up from a net 35% in June.

Fears over Europe are riding high following recent eurozone developments. Nearly two-thirds of European respondents to the BoA Merrill survey identified EU sovereign-debt risks as the number-one tail risk (64% this month, up from 43% in June).

European investors have sharply reduced positions across many sectors, but particularly in banking. A net 57% of European respondents are now underweight banks, compared to 33% last month, the most bearish view since February 2009.

A total of 265 panellists with $792 billion of assets under management participated in the BoA Merrill survey from 8 to 14 July. A total of 196 fund managers, managing $631 billion, responded to the global questionnaire. A total of 149 managers, managing $409 billion, responded to the regional questionnaire.