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Asian debt markets to continue attracting investors

Category: Asia, China, Global, Europe

Development of dim sum bond market a significant milestone

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Amundi’s Philippe Jauer, Chief Investment Officer – Global Fixed Income & Forex (Asia) and Raymond Lim, Head of Asian Bonds, talk to Asia Asset Management about how the Asian bond market is progressing.

Asia Asset Management: Discuss the current environment for Asian bonds for both hard and local currency; this is both from the perspective of new issues, pricing and volumes.

Amundi: Asian bonds are in a sweet spot today. Asian economies are in the pink of health and this has helped Asia weather the global financial crisis in 2008 and the European debt crisis in 2011. Asian banks remain very well capitalised and corporate balance sheets are in good shape. The sovereign upgrade cycle that has recently seen Indonesia upgraded to investment grade is intact. At the same time, Asian bonds offer higher yields than other regional bonds. Investors are well placed to benefit from the higher yields that Asian bonds offer and at the same time participate in the potential upside from improving credit quality.

How has this asset class been impacted by the ongoing Euro sovereign debt crisis and what are yield spreads like in the last six months and where do we go from here?

Asian bonds have experienced a contagion impact from the European debt crisis. Credit spreads for Asian issuers have widened in sympathy with tightening global credit conditions. Asian currencies have also weakened as a result. However, economic activity has held up well in Asia despite the threat of a recession in Europe. Asian economies are increasingly dependent on domestic demand and this has helped to keep corporate profitability high. We expect this to be reflected in the credit spreads of Asian corporate bonds and current levels represent an opportunistic entry level for investors.

Going forward, how do you see the Asian bond market developing?

The capital markets in Asia have developed significantly in the past decade. Asia is the fastest growing region in the world today and we expect Asian debt markets to continue to attract investors. With rising prosperity and wealth accumulation, we expect Asia to become increasingly self reliant for its capital needs and this will bode well for increased primary activity in both Asian external debt and local currency debt markets. Asian bonds are also under-represented in global indices and we expect allocation to Asian bonds will grow in line with further development and liberalisation of the debt markets in Asia.

RMB bonds have generated much interest; how do you see the development of dim sum bond market and where are the big trends in the next three-to-five years? What other compelling opportunities do you see in Asia’s bond markets today?

The RMB bond market is an example of the exciting opportunities that Asian bond market offers. The internationalisation process of the RMB will uncover many opportunities for investors. The development of the dim sum bond market is a significant milestone and offers an important additional source of investment for those attracted to the currency. At Amundi, we envisage that the RMB bonds will become an important asset class for global bond investors and we have developed an expertise in this specific segment, offering solutions for our clients.

The Indian bond market also offers a unique opportunity for investors to invest in a market where both interest rates and INR are attractively valued. To this end, Amundi, with its JV partner, SBI FM, is launching a product this month to benefit from this opportunity.

The other interesting development is the Islamic Bond or Sukuk market. The demand for sukuk is currently outpacing the supply as Islamic financial institutions experience spectacular growth in this region. As more sukuk issuers tap the international market, the structures are more in line with international standards (eg Reg S and 144A). Sukuk is now a credible alternative to conventional bonds and offers the advantage of diversification away from traditional lending.

From an institutional investor perspective, what you are recommending to your clients in terms of allocations to Asian bonds and how will such an asset allocation sit in the overall context of an investor’s portfolio from a risk and return point of view?

Asia is a dynamic region offering investors a wide array of investment choices. The region comprises sovereign and corporate issuers spanning the entire credit spectrum. Asian currencies also offer potential appreciation. Against this backdrop, Asian bonds are increasingly seen as a separate asset class that warrants an increased allocation for investors who wish to participate in the fastest growing region in the world. At Amundi, we have a suite of expertise and products investing in Islamic and conventional debt instruments using absolute return or benchmark related strategies.

This statement is prepared for information only. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Amundi Singapore Limited makes no representation as to its accuracy or completeness. Opinions expressed in this report are subject to change without notice, and no part of this document is to be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments. We do not accept liability whatsoever whether direct or indirect that may arise from the use of this document. Past performance is not necessarily indicative of future result.

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