As 2019 draws to a close, a consistent theme has emerged among Asia ex-Japan markets—the lure of low-risk products. Cerulli’s data for the first nine months of the year shows that bond funds have emerged as the top category in terms of net new flows in the region.
In China, investors have been rushing to bond funds since 2018 amid declining yields on money market funds (MMFs) and regulatory initiatives to prevent systemic liquidity risks resulting from the massive growth of the MMF sector. India was the only market in the region where bond funds saw outflows during January–September, due to stress in the credit market following a few instances of defaults in local bonds.
Investors’ conservative stance in the rest of the markets does not come as a surprise against the backdrop of easing monetary policies of central banks and the slower global economic growth. This has forced investors to search for products that provide assurance of income and capital protection, and prevent downside risk in a risk-off environment. Hence, bond funds have gained net inflows in markets such as Hong Kong, Singapore, and Taiwan.
Risk-off sentiments have been observed in Southeast Asian markets as well. In Thailand, net flows reversed in favour of bond funds in September 2019 year-to-date, compared to the outflows seen in 2018. In Malaysia, institutional investors are shifting to bond funds following the removal of the tax exemption on wholesale MMFs, whereas retail investors are inclined towards target maturity products.
Target maturity funds or fixed-maturity funds have been in the limelight in some markets. Fixed-maturity plans (FMPs) witnessed considerable demand last year, and continue to receive interest in 2019. Markets such as Hong Kong, Singapore, and Taiwan have seen a slew of fixed-term fund launches this year.
With market expectations of a rate cut from the Federal Reserve, it is likely that the pace of FMP launches could slow down, although a few more such launches to lock in high yields before a potential rate cut cannot be ruled out. However, the right product timing is key to raising assets in FMPs, especially given the easing rate cycle.
“The demand for income in the region will only intensify, given the uncertain market conditions and conservative investor sentiments,” says Ken Yap, managing director, Asia with Cerulli Associates. “As risk appetite improves, investors could look for other income-generating assets, such as equity-income and income-offering multi-asset funds.”