Asian investors favour equities as inflation hedge: BarCap survey

Asian investors are growing less risk-averse and favour equities as an inflation hedge, finds Barclays Capital in its annual Asia wealth-management survey, which is published today.

The survey highlights wealth managers' views on asset allocation and the attractiveness of different markets, among other things.

Some 74% of respondents say their clients make 'full' or 'substantial' use of equities to hedge against inflation, while 55% say the same of gold and 42% the same of other commodities.

Fewer than one in five say their clients make full or substantial use of inflation-linked bonds, whether issued in emerging markets, Asia, the US or UK. However, around half of those polled say their clients do make limited use of such products.

“I’m not surprised that people choose stocks in inflationary environments rather than putting everything into gold,” says Peter Hu, Asia ex-Japan head of investor solutions at Barclays Capital in Singapore. “It’s an obvious inflation hedge.”

He suggests inflation-linked bonds such as treasury inflation-protected securities, or Tips, are a likely choice for institutional investors. But equities are easier to access for retail individuals and tend to have a lower cost of carry than commodities. Moreover, emerging markets are where inflationary pressures are greatest, adds Hu, yet inflation linkers are not as readily available in such countries.

Meanwhile, Asian investors’ growing risk appetite is clear. Around half (55%) of respondents see the search for simple and transparent access products (delta one strategies) as a key trend, down from 82% last year. In addition, 57% say their clients use capital-protected products, down from 75% last year, while 47% say their clients use leveraged products, up from 37% last year.

That said, growth is no longer viewed as the most important product feature by wealth managers as it was in 2010. Liquidity takes top spot this year, with 68% citing it as ‘essential’ or ‘very important’.

“One of the more notable shifts in client sentiment following the financial crisis was the increase in demand for more vanilla or transparent products,” says Hu. “However, our survey is clearly pointing towards a shift in that trend over the past year. We now see risk appetite increasing as they feel more comfortable with the recovery of global and regional economies.”

Looking ahead, equities appear likely to be the most popular asset class for the next six months, with 70% of wealth managers expecting to see allocations rising to Asia ex-Japan equities and 65% to US equities. Second most popular are commodities, with 48% expecting to boost allocations in that area.

Fixed income is not flavour of the day, however: only a third plan to allocate more to emerging-market bonds in the next half year, and just one in five aims to increase exposure to developed-markets bonds in that period.

Finally, in terms of where wealth managers expect to see the quickest growth in the next two years, China and India are leading the pack, with Australia and Korea expected to be the regional laggards. 

Predictably, perhaps, this is reflected in respondents’ views on which markets are likely to be most attractive for business expansion in 2011. China, India, Hong Kong and Indonesia lead the pack, while Korea, Malaysia and Australia come bottom.

But as fund-management heads commented in a panel recently, future revenue growth is often predicated on past growth, which isn’t necessarily the best approach.

Barclays Capital carried out this poll leading up to its sixth annual wealth management conference held in Singapore last Friday. The survey attracted 129 participants from 104 firms across nine Asian countries, including asset managers, insurance companies, local and global retail banks and private banks.

The composition of respondents is 19% ultra high net worth, 43% high net worth, 20% mass affluent and 18% retail. The vast majority were based in Hong Kong and Singapore.

The eyes of wealth managers around the world are likely to remain glued to Asia for the coming months, if not years, given that it's the fastest growing region in terms of private wealth.

The collective worth of the global high-net-worth community increased by 22% last year, according to the 2011 Wealth Report published last week by US bank Citi and UK property firm Knight Frank. The biggest increase in wealth was in the Asia-Pacific region (+35%).