Corporate Governance, Transparency Concerns Impede Investment in Asia

With many developed countries weighed down with debt and facing years of sluggish growth, many investors are looking to the dynamic markets of emerging Asia as one of the most promising sources of long-term growth. Global financial institutions are therefore expanding their allocation to Asian asset classes in the hope of better returns and improved diversification, particularly in the context of weak growth in their domestic markets. But concerns about transparency and regulatory rigour across the region are still commonly cited as barriers to investment in Asia.


These are among the results of a global survey of 109 institutional investors, conducted by  the Economist Intelligence Unit in February 2010. The study, entitled "From West to East: Gauging Institutional Investor Attitudes to Asia," was sponsored by Fidelity International. The aim of the study was to assess the appetite among international investment managers to deepen their exposure to the Asia-Pacific region and to gauge whether, in the view of these investors, Asian financial centres are in a position to overtake their Western counterparts.


The survey finds that China and India will attract the most significant new capital flows over the next year, with 58% of respondents planning to increase their allocation to the former, and 47% to the latter. Few see growth in the region as a flash in the pan: just 21% of respondents think that the Asian growth story has been over-hyped, nearly the same number who think the region’s recovery from the recent crisis is a product of fiscal expansion and is therefore not sustainable.


Another finding is that a majority of respondents say that investing in asset classes in Asia such as equities, real estate, alternative assets and currencies is riskier than similar investments in Western markets. The exceptions are bonds and government debt, where a majority believes that the risks are equivalent or lower. Some 54% of respondents also agree that Asia is more prone to asset price bubbles than the West. However, respondents also believe that the rewards more than compensate for the risks. The majority believes that returns are greater across all asset classes in Asia than with equivalent investments in Western markets, with government debt the only exception to this view.


Meanwhile, a lack of knowledge and expertise about Asian markets is seen as the most significant reason, along with concerns about political stability, preventing institutions from investing in the region, cited by 32% of respondents. But a lack of understanding does not automatically lead to a cautious approach. Among those respondents who cite a lack of knowledge and expertise as a barrier to further investment, 46% say that they are increasing allocation to China, and 31% to India, suggesting that some institutions could be raising their exposure to Asian markets without having the appropriate knowledge and expertise in place.


Despite seeing significant opportunities, international portfolio investors continue to worry about a lack of transparency in Asia. Notwithstanding the huge variation between countries, from the relatively high levels of transparency and disclosure in Hong Kong to the more restrictive and opaque nature of investing in China, 61% of respondents see transparency as the main barrier to the development of financial centres in the region. The quality and rigour of regulatory infrastructure in Asia follow close behind in their list of concerns.


The report also reveals that despite confidence in the skills of local market participants and in the markets' increasing sophistication, just 24% of respondents think that Asian financial centres, such as Hong Kong and Shanghai, will supersede their Western counterparts, such as London and New York, in size and importance within a decade. Even among respondents based in Asia-Pacific, who might be expected to be most confident of a change in the guard, just 39% agree with that statement.


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