Global Investors wary of Political Instability of APAC in 2014

Investment professionals worldwide report greater optimism over economic prospects for the coming year, although those in Asia Pacific (APAC) tend to be more cautious, according to the CFA Institute 2014 Global Market Sentiment Survey (GMSS).

The 2014 findings, drawn from 6,561 members surveyed worldwide, show that 63 percent expect the global economy to expand, up from 40 percent in last year’s survey. Most optimistic are members in the United Kingdom (78 percent) and Brazil(74 percent), while those in Hong Kong and mainland China are the least (54 percent and 48 percent respectively).

In India, optimism about the global economy has grown significantly with 56 percent predicting an expansion, up from 38 percent a year ago. Indian members are even more upbeat about their local market. Six in 10 (61 percent) respondents here expect India’s economy to expand in 2014. Within APAC, only Japan (73 percent) is more positive. However, concerns about political instability may affect the outlook. An overwhelming eight in 10 (78 percent) cite this as the biggest risk to the local economy — the highest among the major markets surveyed. Most other markets cite weak economic conditions or emerging market growth rates as the top threat to their domestic economies.

When asked what impact certain other events would have on the local economy, responses from India are also among the most pronounced. Almost all (96 percent) feel that effects on energy prices caused by unrest in the Middle East will have a negative impact. More Indian respondents also believe that progress of recovery in Europe would have a positive impact (85 percent), to a much greater degree than they believe progress of recovery in China (56 percent) or even domestic political stability (58 percent) would.

“India heads into a general election next year so that is likely why concerns over domestic political instability feature so prominently,” said Navneet Munot, a director of the advocacy committee and board member of the Indian Association of Investment Professionals (IAIP), a member society of CFA Institute. “Our interest in Europe’s recovery and the impact of unrest in the Middle East on energy prices also reflect how our economy is intrinsically linked to developments in these two regions,” said Mr Munot, who is also the Chief Investment Officer of SBI Mutual Fund.

Indian members are also significantly concerned about the lack of ethical culture within financial firms, with 62 percent identifying that as the main factor causing the current lack of trust in the finance industry. Only Switzerland (71 percent) and Singapore (63 percent) are more critical. Respondents in India say that to improve investor trust and confidence, the top two actions firms need to undertake are: an improved culture established and encouraged by top management (36 percent); adherence to ethical codes and standards (37 percent).

“The number of members who expect the global economy to expand has nearly doubled in the last two years, however this is no time for those in finance to become complacent,” said John Rogers, CFA, president and CEO of CFA Institute. “The survey reflects that investor trust has been eroded and in order for the financial industry to be an extraordinary force for good, we must embrace ethical behavior at all levels. As markets rebound, we are working to ensure that attention does not shift away from meaningful reforms that might restore investor trust and strengthen the financial system’s ability to resist shocks in the future.”

Survey Highlights

APAC investment professionals positive about growth in 2014, but worries evident at local level

• Global economy expected to improve. Fifty-six percent of APAC respondents expect the global economy to expand, up from 32 percent in last year’s survey; but fewer than in the Americas (62 percent) and EMEA (69 percent).
• Opinion divided over local economy. Fifty-two percent of members in APAC expect their local markets to grow in 2014, up slightly from 46 percent in last year’s survey. Respondents in Japan are the most confident within the region and among the top two globally with 73 percent anticipating an expansion, with India second at 61 percent. Hong Kong respondents (37 percent) are the most cautious.
• Concerns about weak economic conditions. Similar to respondents in China (44 percent), about four in 10 respondents in India (43 percent) see weak economic conditions as the biggest threat to global capital markets. Worldwide, 31 percent cite this as the top risk.
• Almost half of Indian respondents expect a real estate bubble locally, in line with the broader sentiment in APAC (mainland China — 77 percent, Hong Kong — 68 per cent, Singapore — 59 percent).

APAC members split on regulatory/ industry actions most needed to reform the local market

• Globally, better enforcement of existing laws is the top choice (30 percent). The same view is reflected in China (34 percent) and Australia (30 percent). But respondents in Japan (11 percent), Singapore (16 percent) and Hong Kong (21 percent) are the least concerned about enforcement.
• Members in Japan (48 percent), Hong Kong (31 percent) and Singapore (23 percent) are more likely to point to the need for stronger corporate governance. India rates both almost equally (31 percent for corporate governance, 32 percent for enforcement).
• Respondents in china are more concerned about improving transparency of financial reporting and other corporate disclosures than any other territory.

Financial derivatives an ethical issue for global markets, market fraud and financial reporting top serious ethical issues in local markets for APAC. 

• Compared to their peers globally, more APAC members identify market fraud (32 percent) and the integrity of financial reporting (20 percent) as the principal ethical issues facing home markets. Indian members are also more concerned about mis-selling by financial advisers (27 percent) locally.  They see the biggest ethical issue facing global markets as the disclosure and use of financial derivatives, with Indian members (34 percent) rating this as more of a problem than other surveyed countries.