Investors in Asia's Wealthiest Markets Struggle to Balance Risk With Expectations, With Investors in China Taking on Too Much Risk -- Manulife

HONG KONG, CHINA - Media OutReach -29 July, 2015 -

• Chinese investors least risk averse among Asia's wealthiest markets, while Japan investors are most risk averse
• Investors' desire to avoid risk at odds with investment behavior across the region
• Concept of taking calculated risks to align with long-term financial goals is still unfamiliar 

A study of Asia's five wealthiest markets by Manulife* shows that investors in China take the most risk, while Japanese investors are the most risk averse, with investor behavior in both countries suggesting that investors still need to improve efficiencies in achieving a balanced risk portfolio to reach long-term financial goals.

The findings in the survey were used to develop Manulife's Risk Appetite Index**, which ranks the territories in the region based on investor attitudes towards risk, looking specifically at the existing asset allocation of household balance sheets, preferences for equity type and investment behavior in mutual funds. The survey revealed that investor risk appetite across the region is at odds with behavior, with investors expressing a preference for more stable investments, while in reality many choose to invest in higher risk investment vehicles.     

 

Specifically, the survey found that in terms of existing asset allocation, investors in China are willing to take the most risk among Asia's wealthiest markets, holding a larger proportion of relatively higher risk assets in their household portfolios (44% compared with 32% in Japan). In addition, despite almost a third of investors in China raising concern about market volatility (29%), they still have the greatest appetite among the five markets surveyed for investing in more risky penny stocks (27% in comparison to only 12% in Japan).

 

Conversely, investors in Japan have the lowest risk appetite and are the most conservative with their household balance sheets, keeping 41% of assets in cash. Even when they do choose to invest in equities, the Japanese prefer to invest in more stable blue chip stocks (75% in comparison to only 51% in China), rather than riskier penny stocks.

 

Further highlighting the different risk profiles of the two markets, the survey revealed that investors in China are more likely to make one-off investments in mutual funds, suggesting a desire to capitalize on market buoyancy for short-term gains. Meanwhile, the Japanese tend to invest in mutual funds via regular installments, suggesting a more disciplined approach.  They are also less concerned about trying to market time their investments, an approach that's rarely successful.  

 

"The recent stock market slide in China can be considered a cautionary tale for investors taking on too much risk," said Ronald CC Chan, Chief Investment Officer, Equities, Asia (ex-Japan). "Many commentators were speculating that Chinese equities were in bubble territory by mid-March 2015. However, investors went on to accumulate an additional RMB1 trillion in debt to finance short-term investments in richly valued stocks before the market peaked in mid-June and began to lose ground. In the correction that followed, more than US$3.4 trillion in equity value had evaporated over the three-week period."[1]

 

"This does not suggest that investors should avoid risk," explained Michael Dommermuth, Executive Vice President, Head of Wealth and Asset Management, Asia, Manulife Asset Management. "Playing it too safe, like many of the highly risk averse investors in Japan, could hurt their ability to generate sufficient retirement income to maintain their living standards. Rather, we believe that investors should consider building a well-diversified portfolio that matches their risk appetite and has the potential to deliver returns that are commensurate to the level of risk." 

 

Investor appetite for risk at odds with behavior

 

The survey showed that among Asia's wealthiest markets, investors frequently express risk preferences that are contradictory to their actions. Investors from four of the five markets surveyed ranked guaranteed incomes and capital guarantees as the top two considerations when making any new investment. Yet investors in these markets still ranked stocks and equities as the most preferred investment vehicle, which are not necessarily the lowest risk in terms of guaranteed incomes.

 

While investors in China ranked top of the Risk Appetite Index, over half of investors in the same market (52%) said they would want to see a guaranteed income before considering a new investment. This is in comparison to only 20% of Japanese investors wanting to see guaranteed income, despite them being the most risk averse. This contradiction between investment attitude and behavior suggests that the Japanese better understand the need to take measured risks to create a balanced and diversified portfolio, but are unwilling to part with their cash in order to achieve greater investment efficiencies.

 

Hong Kong, Taiwan, and Singapore were ranked second, third and fourth in the Risk Appetite Index respectively, displaying further contradictions between risk appetite and behavior. Over a third of Hong Kong investors worry about making the wrong investment decision (36%), yet their preference for direct investment in stocks is the highest amongst the wealthiest Asian markets, at 63%. Meanwhile, nearly half of investors in Taiwan (48%) say they are put off from investing in mutual funds because of concern about the risks involved, but conversely favor riskier penny stocks almost as much as investors in China (22%). Investors in Singapore closely rivalled the Japanese in risk-averse behavior, with 36% of assets held in cash.

 

More broadly, investors in Asia's wealthiest markets are concerned about making the wrong investment decision, with most of them claiming this as the primary reason they withhold making new investments.

 

Mr. Dommermuth concluded, "The key to addressing the seeming contradiction between risk appetite and investment behavior is to help educate investors on the actual risk and potential returns represented by individual asset classes and the market conditions in which they best perform. Armed with this knowledge, individuals can work with their investment advisors to construct portfolios that blend investments from multiple asset classes and geographies to match their risk appetite. Investors also have the option to make investments in professionally managed asset allocation funds that are carefully balanced to match specific risk and return profiles and also have the potential to deliver a recurring income stream. Investments in managed mutual funds can be made as a lump sum or via regular monthly installments that take advantage of dollar-cost averaging to lessen the need to consider market timing as an investment factor." 

 

For more information on the Manulife Investor Sentiment Index in Asia, please visit www.manulife-asia.com.

 

[1] 15 June -6 July 2015; http://www.ejinsight.com/20150713-why-a-shares-will-remain-sluggish-short-term/.

 

 *About Manulife Investor Sentiment Index in Asia Manulife’s Investor Sentiment Index in Asia (Manulife ISI) is a bi-annual proprietary survey, measuring and tracking investors’ views across eight markets in the region on their attitudes towards key asset classes and issues related to personal financial planning. The Index is calculated as a net score (% of “Very good time” and “Good time” minus % of “Bad time” and “Very bad time”) for each asset class. The overall index is calculated as an average of the index figures of asset classes. A positive number means a positive sentiment, zero means a neutral sentiment, and a negative number means negative sentiment. The Manulife ISI is based on 500 online interviews in each market of Hong Kong, China, Taiwan, Japan, and Singapore, Malaysia, Indonesia and the Philippines. Respondents are middle class to affluent investors, aged 25 years and above who are the primary decision maker of financial matters in the household and currently have investment products. The Manulife ISI is a long-established research series in North America. The Manulife ISI has been measuring investor sentiment in Canada for the past 15 years, and extended this to its John Hancock operation in the U.S. in 2011 and Asia in 2013. Asset classes taken into Manulife ISI Asia calculations are stocks/equities, real estate (primary residence and other investment properties), mutual funds/unit trusts, fixed income investment and cash. ** About Manulife’s Risk Appetite Index Manulife’s Risk Appetite Index is a weighted index that ranks the five wealthiest territories in Asia (China, Hong Kong, Taiwan, Singapore and Japan) based on the investors’ attitudes towards risk. It looks specifically at the existing asset allocation of household balance sheets, preferences for equity type and investment behavior in mutual funds. Risk tolerance ratios for asset allocation of household balance sheets are calculated by taking the % of investors in each of the market who hold higher risk assets (Real estate investment; mutual funds; stocks; ETFs) versus the % of investors who hold lower risk assets (cash/deposits; cash deposits in foreign currency; insurance; fixed income investment). Risk tolerance ratios for equities preference are calculated by taking the % of investors in each market who prefer growth/penny stocks versus the % of investors who prefer blue-chip stocks. Risk tolerance ratios for investments in mutual funds are calculated by taking the % of investors in each market who make one-off investment in funds versus the % of investors who make regular investments and those who do both regular and one-off investments. 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