As the markets become more convinced that China will manage an economic soft-landing, fund managers have turned positive on resurgent China equities.

According to the HSBC Fund Managers’ Survey, respondents are starting to shift from neutral to overweight views on Greater China equities. After being one of the worst performing assets last year, Chinese equity markets have staged a dramatic rebound in 2012.

The MSCI China Index and the Hang Seng Index fell 18.2% and 17.3% in 2011, versus a 2.1% gain for Standard & Poor’s 500 in the U.S. and a 10.5% drop for MSCI Europe. The performance reversed in the last quarter as Chinese equities recovered by 8.1%.

The combined effects of lower valuations, the recovery in 2012 and monetary policy easing have created an atmosphere that promises higher equity market returns. Greater China equities are trading at a price-to-earnings ratio of nearly 12 times for 2012.

“With an attractive valuation, Greater China equities may offer potential wealth opportunities,” said Malik Sarwar, head of wealth development, group wealth management, HSBC. “China’s recent monetary easing measures, such as cutting the reserve ratio requirement, also improved market sentiment. Investors expect further easing which will continue to support the Chinese equities market.”

The survey noted that 56% of the global fund managers are most optimistic and overweight China equities, indicating a move away from cash.

Apart from Greater China equities, an increasing number of fund managers favour emerging markets equities (55%) and Asia Pacific ex-Japan equities (40%) this quarter, compared with 27% and 20% respectively in the last quarter of 2011.

Further, 44% of fund managers favour bonds as an asset class, compared to 22% in Q4 of 2011.
As many companies have solid fundamentals and are supported by relatively strong Asian economies, the majority of respondents are bullish on Asian bonds (88%) and global emerging markets/high yield bonds (78%) while bearish on European bonds (89%).

“While the survey shows a continued and increasing preference for bonds as investors look for yield in a prolonged low interest environment, fund managers are looking at riskier assets again on the back of improving economies, resilient corporate earnings and attractive valuations,” said Sarwar.

Funds under management (FUM) across 13 of the world’s leading fund management houses polled reached $3.81 trillion (U.S.) at the end of 4Q 2011, up 3.7% from the previous quarter.

Reflecting investors’ conservative outlook amidst a volatile market, money market funds contributed 36.2% of the increase in FUM.

The survey recorded a net outflow of $42.2 billion (U.S.) for equity funds in 4Q 2011 as investor sentiment was dampened by the European debt crisis. As investors continued to search for safe havens, bonds fund recorded a net inflow of $19.7 billion (U.S.) last quarter, particularly U.S. bonds.

“This quarter, there are signs of improved investor outlook, with selective prospects in equities and bonds,” said Sarwar. “In a dynamic market, retail investors should review their asset allocation strategies regularly and re-balance their portfolios to tap investment opportunities aligned with their risk appetite.”