A sharp improvement in Japanese investor sentiment, along with a general warming towards equities, lifted overall regional investor sentiment slightly higher in the fourth quarter of 2013, according to the latest Manulife Investor Sentiment Index for Asia.
The Manulife Investor Sentiment Index for the three months to December 31, comprising investors from Mainland China, Hong Kong, Indonesia, Japan, Malaysia, Singapore and Taiwan rose to 16, from 15 in the third quarter.
The latest quarter included the Philippines for the first time; and with their results included, overall sentiment rose to 22, level with fourth quarter investor sentiment in the United States.
Investor sentiment in Japan rose 9 points in the fourth quarter to 18, with the only other rises in the region seen in Indonesia (up 3 to 41) and Hong Kong (up 1 to -13).
Despite the slight uptick, Hong Kong remains the most pessimistic in the region, followed by Taiwan. With a reading of 66, the Philippines has by far the most optimistic investors in the region.
Sentiment towards most of the asset classes in the survey is little changed overall, with the exception of equities, which rose modestly albeit from a low level (up 3 to 9). Cash and own-residence property remain the two most-favored asset classes.
Confidence in fixed income
Despite widespread speculation about tapering of the quantitative easing program and its potential impact on bonds, investor sentiment towards fixed income (20) remains substantially above equities.
However, fixed income ranks lowest when it comes to actual investment, with investors holding just 5 per cent of their portfolios in bonds.
"We see reasons for investors to shift their exposure from a non-performing asset class like cash to fixed income securities with higher recurring income potential during 2014," said Endre Pedersen, Managing Director, Fixed Income with Manulife Asset Management. "Over the medium term, we expect fixed income investment to continue delivering positive returns. We think it's best to focus on corporate debt on a selective basis, because we think it will generate higher average returns than sovereign debt in the current market. We expect coupon payments to account for the bulk of fixed income returns this year and are particularly constructive on corporate debt in the lower-end investment grade and strong non-investment grade range."
Japanese investor sentiment rises
Investor sentiment towards equities in Japan climbed to 36 from 21 in the fourth quarter, driven by a 57 per cent rise in the Tokyo stock market in 2013. However, the index for Japan still lags the US (up 7 to 52), where the Dow Jones Industrial Average rose 26.5 per cent during the year.
The gains in the Japanese stock market were spurred by better corporate performance as unprecedented government stimulus -- popularly coined "Abenomics" -- has driven rounds of currency depreciation, a pick-up in the economy and modest inflation. However, the gains were not mirrored in Japanese investors' equity holdings, which dropped three points to 16 per cent of their portfolios.
"Domestic equity market returns have been weak and overseas investment returns have been undermined by yen appreciation over most of the past 20 years. As a result, previous attempts to promote more active investment have not delivered the expected results," said Naru Ishida, President and CIO of Manulife Asset Management Japan. "However, we believe that the government's recent introduction of tax free accounts for investment -- the Nippon Individual Savings Accounts -- will help raise purchases of stocks and trusts, given that the government continues to support the market through easy monetary policy, fiscal spending and asset purchases."
Elsewhere, in Malaysia, sentiment towards stocks rose to 30 from 18 in the third quarter, perhaps getting a boost from the local stock market's strong finish to the year -- up 10.5 per cent in 2013.
Philippines investors (48) were nearly as positive towards stocks as those in the US (52), perhaps reflecting optimism over its economy being one of the fastest growing in the region, rather than the stock market, which rose only 1.3 per cent during the year.
In contrast, in Taiwan, where the stock market was up almost 12 per cent on the year, sentiment towards equities sank deeper into negative territory (down 4 to -17).
Elsewhere, sentiment towards equities was barely positive, including in Hong Kong (up 1 to 2) and Mainland China (up 3 to 1), where local market performances ranged from lackluster to dismal: with Hong Kong up 2.87 per cent in 2013 and with Shanghai down 6.8 per cent -- the worst performer in the region.
Appetite for cash defies logic
Given the prospect of rising interest rates, inflationary pressures and currency depreciation, holding cash may not seem to be the best investment option. Yet cash remains the favored asset class across the region, with sentiment towards it particularly strong in Malaysia, Indonesia and the Philippines -- all scoring between 70 and 80. In contrast, sentiment towards cash in the US was very negative (-54).
Asian investors keep a massive 41 per cent of their total assets (excluding their home) in cash, or about 21 months of personal income -- 33 months in Singapore and 35 months in China. Cash held by investors in Japan rose to 20 months from 16 in the previous quarter, possibly due to switching out of equities.
"Investors tell us the main reasons they are holding on to cash is because they want safety and liquidity. But our survey shows that only a fifth of their cash is held for everyday and emergency needs, leaving nearly four fifths of the cash sitting idle," said Robert A. Cook, President and CEO of Manulife Financial in Asia. "Asia does a great job saving cash compared to say the U.S., but by not putting some of that money to work, they can miss out on opportunities to get meaningful returns."