Institutional investors in Asia should adopt a more systematic approach to their equity allocations, which have continued to favor domestic stocks despite the risks of heightened short-term volatility, reports by MSCI Index Research and BlackRock Inc. show.
While it's tough to make generalizations about the 10 or more markets in Asia ex-Japan, the reports note institutional investors in some countries, such as the Philippines and India, still invest strictly in domestic stocks.
Other big investors — including Taiwan's Labor Pension Fund, South Korea's National Pension Service and China's National Council for Social Security Fund — put between 50% and 80% of their equity allocations in domestic stocks, a significant “home bias” in a region whose combined share of a market cap-weighted global portfolio comes to roughly 10%, according to BlackRock's report.
Asia-based investors have trailed their U.S. and European counterparts in an ongoing shift to more global equity market weightings from home bias — in part because of expectations that Asia's stellar growth prospects will mean superior returns for equity markets in the region, the reports note.
The evidence for any nexus between economic growth and equity market returns remains mixed at best, according to analysts at MSCI and BlackRock.
Available data are ambiguous as to whether a home bias “will reward you or be bad for you,” said Chia Chin Ping, a managing director and head of equity research, Asia-Pacific, with MSCI Hong Kong Ltd.
Lacking such evidence, institutional investors in the region have to make a “conscious, active decision” for staying at home, evaluating the risks and opportunity costs of that decision, Mr. Chia said in a telephone interview.
“There's no clear right or wrong” answer — just a matter of balancing the risks, agreed Stephen Hull, BlackRock's Hong Kong-based director of multiasset strategies, in a separate interview.
“Every institutional investor has to consider what its primary objectives are,” and part of that process will include determining “the level of underperformance they're willing and able to tolerate” vis-a-vis a global, market cap-weighted benchmark, “and over what time horizon,” he said.