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AM Heat Map: Equity fund interest creeps up in Asia

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Equity appetite amongst Asian investors evaporated in 2016, but 2017 has kicked off with increased interest in all major equity fund peer groups, according to APB Mandate’s latest Asset Management Heat Map, an exclusive weekly column analysing regional fund demand based on internet traffic data provided by fundinfo.

Four percentage point boost to equity fund traffic share
In the previous rendition AM Heat Map, Asian (Hong Kong and Singapore only) equity fund traffic represented 20% of the total share of the top ten peer groups. Since then, however, this share has exceeded 24%, with all pure equity-related peer groups experiencing growth in traffic share.

This is not surprising given the newly-fuelled optimism private banks have towards equity markets, driven especially by the prospect of inflation-triggering US policies.

Asset class/ThemesViewsComments
US equities& currency‘Trump trade’, a bullish US equity and currency with a bearish US Treasuries and Asia ex-Janpan/EM equities, will continue on pause towards the year end, but it will come back."The 'Trump Trade' – which
is essentially a US reflation trade – is likely to come back after a brief pause. Last week’s US jobs data further strengthened market 140 conviction that a 14 December Federal Reserve rate hike is a done
European equities& currenciesItalian referendum result will dampen European equities and currencies, but will not trigger a crisis."The failure of the Referendum will weigh on sentiment towards European stocks and the common currency. But a crisis, it won’t be."
US Inflation&ratesUS Inflation&rates will continue to rise."The Organization of the Petroleum Exporting Countries’ (OPEC) announcement last week of production cuts strengthened market conviction on higher inflation feeding into rates and yields."

*Based on AM Heat Map published in December 23 2016 (https://apbmandate.com/44206/heat-map-income-search-dominates-top-trending-funds-asia/).

According to Lombard Odier, equities are more attractively valued than bonds, with developed market equities expected to “benefit substantially from the new policy mix in Washington and Tokyo”.

UBS echoes this sentiment, highlighting a US earnings projection of 8% in 2017, bolstered by stabilising oil prices, accommodative monetary policy and fiscal stimulus. Its optimism extends to emerging markets.

“A softer USD, low developed market interest rates and stabilising GDP growth and commodity prices should continue to help emerging market stocks next year,” UBS said in a recent investment note.

The improving indicators for equity interest will be a welcome sign for private banks in the region which saw equity volumes virtually evaporate in 2016 — some regional players recorded a 40% plunge in volumes, according to APB Mandate’s internal data.

“In a low interest rate environment coupled with a short-term investment horizon, Asian investors are relatively risk averse and found comfort in income-generating assets such as fixed income,” notes Lawrence Tse, senior vice president at Pictet Asset Management. “As the long-term fixed income cycle is expected to [reach an] inflection point, Asian investors are rebalancing their portfolio allocations from fixed income to equity.”

Robotics tops global fund traffic share
Better fundamentals and supportive political developments are not the only attractive drivers of equity returns. This week, Pictet Asset Management’s Robotics fund topped the list of global traffic share to individual funds (1.55%).

Pictet’s Tse not only the upside of similar opportunities driven by truly sustainable long-term drivers, but also the downside protection from daily volatility, especially from isolated one-off events like 2016’s Brexit or Trump election.

“Since uncertainty is likely to dominate the investment landscape for much of this year and even into the next decade, we believe there is a less volatile way to secure attractive long-term returns,” Tse adds. “Investors should consider focusing on mega trends or structural forces shaping our world. These powerful global forces are affecting the world economy in a pervasive, persistent and profound manner. And no investor can afford to ignore them.”

Robotics is certainly one such trend and sales are projected to grow at an annual double-digit rate – at least until 2025 – supported by demographic, technological and suitability trends.

“We believe the robotics revolution has reached a tipping point and will be moving into the mainstream, permeating the business world and our daily lives,” Tse says, highlighting rapid improvement in robotic flexibility, dexterity, mobility and promising applications in the IT, industrial and healthcare sector, especially for SMEs.

“Growth prospects are impressive and underestimated. We believe there will be multi-fold growth in robotics and artificial intelligence which will be faster than the global economy. Robotics is set to become ubiquitous.”

The AM Heat Map is based on traffic from more than 10,000 monthly views from Asian and global banks from the distributor network of leading fund document library, fundinfo (for more information, click here[https://trendscout.fundinfo.com/).

APB Mandate will share its weekly view on the state of fund demand within the private banking industry from both a regional and global view.

For an overview of the top 10 trending funds, fund categories and asset managers (1-year, 1-week rolling), see the following.

Asset class/ThemeHouse viewKey comment
EquitiesOverweight US and EM equities"Although equities have fallen modestly after the announcement, we do not expect a repeat of the larger sell-off that followed the Fed's last rate hike in December 2015. A year ago, US earnings growth was negative and decelerating, oil prices were falling, the manufacturing surveys pointed to contraction, and uncertainty was high over Chinese government policy. In contrast, at present year-on-year US earnings growth has turned positive, oil prices have been trending higher, the manufacturing sector is expanding, and risks of a Chinese hard landing appear lower.

Higher rates should also favor cyclical over defensive equity markets. We reiterate our overweight position in emerging market stocks versus our underweight position in Swiss equities given a high index weighting toward lower-volatility, bond-proxy sectors."
EURUSDNegative on USD relative to EUR"Although the US dollar has strengthened modestly in the aftermath of the decision, Yellen assured investors that she continues to envisage only a gradual tightening of US monetary policy, and inflation projections remain modest. With the dollar still significantly overvalued relative to the euro, we see EURUSD moving higher over the next six months as Europe’s growth and inflation outlook improve."
Government bondsUnderweight high grade bonds in global portfolios"Moves so far in US government bond yields look consistent with the Fed's projections for slightly higher growth, lower unemployment, and inflation advancing toward the 2% price stability goal. That said, a sharp and persistent rise in yields looks unlikely given cautious tightening from the Fed, along with the Fed's reiteration of a 3% long-term Fed funds rate."
1World (Equity / Regions)9.19%
2World, Aggregate (Bond / Multi Currency)4.76%
3Multi Strategy (Liquid Alternatives)4.19%
4Europe (Equity / Regions)3.41%
5USA (Equity / Countries)3.33%
6World, Emerging Markets (Equity / Regions)3.33%
7World, High Yield (Bond / Multi Currency)2.47%
8CHF, Strategy Balanced (Portfolio Funds)2.33%
9Technology (Equity / Sectors)2.31%
10Switzerland (Equity / Countries)2.25%
Asset class/ThemeHouse viewKey comment
EquitiesFinancial stocks to lead, rate-sensitive sectors and EM to lag"The most rate sensitive sectors will continue to be negatively affected. This may translate to potentially positive performance from financials, while defensive sectors (utilities, telecoms, consumer staples) would come under additional pressure."

"Asian (including Hong Kong and Singapore) equities are likely to consolidate at current levels, while Japan would benefit from a continuation of the recent JPY weakness against USD."
Fixed incomeShort duration and financial exposure preferred, high yield negatively impacted"In this environment, emerging market bonds could be under renewed pressure in the very near term. However, we expect current levels to be a good entry point for Asian investment grade corporate USD bonds."

"After a first outperformance given their relatively short duration, high yield bonds could be negatively impacted by a spread widening with too rapid rate increases deteriorating the default outlook. "
Currencies and goldUSD to further strengthen"The USD is likely to strengthen, driven by prospects of higher yield support going forward. However, the currency reaction will crucially depend on the Fed’s rational for its hawkish projections (growth or inflation driven, or both) and the reaction of risky assets."

"In absence of concerns of a Fed policy mistake, USD strength would likely be broad based, including against the JPY and Asian currencies. We maintain our neutral view in Gold at current levels."
ValueExpected annual returns
1st quartile5.00%
2nd quartile/median6.00%
3rd quartile6.25%
4th quartile/maximum8.00%
Asset class/ ThemeHouse viewKey comment
EquitiesStrong economy to support equity markets“Whilst cautious in the near term given the 6% rally in equity prices since the election, a strong economy remains supportive of equity markets in the long-term."
Fixed incomeModerately strong economic cycle to support credit markets“For fixed income markets, a moderately strong economic cycle remains supportive of credit markets, [both investment grade and high yield], particularly versus the Treasury market."

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