Asian investors seek higher returns in private markets

AS MAJOR central banks begin easing policy, investors who have favoured high-yielding cash in recent years now face a new challenge as returns are expected to decline. To better position for the next phase of the economic cycle, it is time to move out of cash and seek higher yields elsewhere, while navigating heightened macro uncertainty and geopolitical risks.

Against this backdrop, our recent Gatekeeper Pulse study found that Asian fund selectors representing some of the world’s largest financial institutions are prioritising diversification, risk management and income generation in their portfolio strategy. Private alternatives, active fixed income, global equities and artificial intelligence (AI)-driven sectors such as data centres are emerging as key asset classes for increased allocation in the coming year.

Underexposed to alternatives

Global private investor allocation to alternative investments is poised to rise from an estimated US$4 trillion last year to US$13 trillion by the end of 2032. However, a striking 76 per cent of Asian fund buyers pointed out that investors in this part of the world remain underexposed to the burgeoning private market sector.

The lack of access to private markets and lower risk tolerance are the key barriers. This is driving managers to offer more favourable fee structures, enhanced transparency and improved availability to motivate greater allocations to alternative assets. There is also clearly a need for more education and training on the benefits of private alternatives within a diversified portfolio.

While public markets are vulnerable to short-term fluctuations, private markets offer investors stronger risk-adjusted returns, volatility hedging and downside protection. With concerns over stock and bond correlations, 64 per cent of Asian gatekeepers plan to turn to private alternatives in search of diversification.

Data centres in the spotlight

Notably, data centres are gaining popularity among investors, thanks to accelerating technological transformation powered by AI. Over the next 12 months, 59 per cent of Asian fund selectors intend to increase allocations to this growing alternatives sector. Driven by surging demand for data storage amid supply constraints, data centres are transitioning from a niche investment into the mainstream and offering a generational growth opportunity for long-term investors.

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign Up

Sign Up

Elsewhere within the private markets, Asian fund selectors are optimistic about the outlook for global private credit, with six in 10 forecasting private credit returns to increase in the coming year. Many are targeting direct lending, fund of funds, mezzanine, special situations and secondaries.

Bonds in strategic buy zone

Today’s elevated yields provide a favourable environment for bond investors, presenting an opportunity to lock in higher starting yields that are at levels not seen in a decade. When central bank policy shifts to holding or cutting patterns, stocks and bonds tend to exhibit lower correlations.

This strengthens the case to diversify into bonds, which should offer a more attractive return profile while they cushion shocks from equity market corrections. Over the next year, 59 per cent of fund selectors anticipate increased returns from the public bond markets, while 52 per cent plan to raise public fixed income allocations, more than any other asset classes. In search of alpha, 74 per cent are adding credit risk within investment-grade, while 67 per cent favour high-yield bonds.

SEE ALSO

Warburg, Lendlease buy S$1.6 billion in industrial assets from Blackstone-Soilbuild private Reit

Temasek’s SeaTown raises over US$1.3 billion for private credit fund

Moreover, the divergence in central bank policy globally is creating opportunities for active bond managers to generate additional alpha.

Solid fundamentals fuel growth equities

Despite ongoing market volatility, a notable 74 per cent of Asian fund selectors believe that a declining rate environment will prompt redeployment of cash into equities, though a home market bias is evident. Two-thirds of fund selectors in Asia intend to increase allocation to Asia Pacific equities over the next 12 months, which is 50 per cent higher than the overall average. Global equities (57 per cent) also rank among the top targets for increased allocations, followed closely by thematic equities (54 per cent). Fifty-nine per cent expect growth equities to outperform value stocks, as the latter rely more heavily on the business cycle.

While policy easing would provide a tailwind, corporate fundamentals are the true driver of long-term equity returns. As the broader economy slows, companies boasting durable earnings growth and robust demand will become more attractive, which should bode well for growth stocks in a slowdown.

Moreover, dynamic growth stemming from innovative forces outside the economic cycle present compelling opportunities, in particular around the themes of AI-driven advanced technology, global luxury consumer, industrial automation, fintech and healthcare innovation.

The writer is head of Asia, PGIM Investments