Hong Kong investors turning cautious

Allianz Global reports investors are switching out of equities.

Hong Kong retail and MPF investors had demonstrated a zest for equities at the end of last year but have now begun placing new allotments into cash and fixed income, reflecting growing concerns over the global economy, says Mark Konyn, CEO at Allianz Global Investors (formerly known as Allianz Dresdner Asset Management).

He says a global growth slowdown will be reflected in relatively weak performance in balanced funds this year. Whereas Allianz's flagship global balanced fund (with a Hong Kong bias) returned 15% last year, it has lost 1% return year to date, and Konyn expects it won't return more than 5% throughout 2005. Similarly he expects heightened volatility to eat returns in growth-oriented portfolios, predicting Allianz's MPF growth portfolio will return 6-8% over the next 12 months.

Fixed income is not going to serve as a haven for equity-wary investors. "Strong bond performance is unlikely given tight spreads in all sectors," Konyn says.

The vast majority of MPF members do not adjust their asset allocation, but as MPF accounts have become significant in size, people are beginning to become more active, particularly regarding voluntary contributions. Allianz recommends MPF members resist trying to time markets.

This is a result of macro conditions, dominated by uncertainty over US economic growth prospects, and worries about higher-than-expected inflation. The rally of late-2004 failed to gain momentum, thanks to rising US interest rates, high oil prices and unexpectedly weak US GDP growth of only 3.1% in the first quarter - a two-year low.

Moreover, last year's strong earnings growth story is running out of steam, particularly in the US, and Allianz expects more disappointments than upside surprises. Dear oil, rising mortgage rates and inflation are starting to dampen American consumption.

From a portfolio manager's point of view, investor caution over the coming months is likely to set up an attractive equity story toward the end of the year, particularly in Asia ex-Japan, but with high volatility.

The outlook for equities in Asia ex-Japan is somewhat brighter, and Konyn expects Asian performance to carry growth strategies through the year. The earnings story still has legs among Asian listed companies. The rise in US interest rates and declining earnings in China has begun slowing capital inflows to that country. If US interest rates head north by another 75 basis points this year, capital flows may reverse out of China, and Allianz therefore doubts any revaluation of the renminbi is imminent. Hong Kong is flush with liquidity and is relatively less sensitive to US interest rate hikes.

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