Yielding to temptation
In terms of Asian economic power, the past year has been transformative. Though the West has been ceding global economic power wholesale to Asia since the global financial crisis, the capital flows heading East over the past 24 months, and last 12 in particular, have brought about a level of economic development and financial integration that is extraordinary. Two of the key draw cards have been high-yielding corporate and government bonds, which simultaneously highlight Asia’s enduring capacity for growth (and its need for capital) and the West’s enduring failure to resolve its problems (and its lack of yield and opportunities). Their capacity to offer all important income in a world of extreme volatility has placed them at the top of the menu for fund managers across the board.
Whether or not the West continues to suffer lost years, à la Japan, or can spend its way out of recession and see capital return to a more normal interest rate environment, exciting regional investment opportunities will no doubt continue flowing within Asia. At some point, however, the utility of such capital must start to decline, and that must be properly reflected in pricing. The question is: Is there a link between the emergence of low yield frustrations in the West and the flow of capital into Asian high yield, which would suggest irrationality, or are such events purely coincidental?
Despite the latest wave of monetary easing policies across the US, Europe, and Japan, recent data has shown declines in regional GDPs, regional exports, and regional corporate earnings results and forecasts. Meanwhile, Fitch Ratings downgraded its 2012 GDP forecasts for both India and China at the end of September, by 0.2% and 0.5%, respectively. When it comes to high yield products, market players warn that a lack of rationality is emerging. Given the traditional illiquidity of these markets, it’s not a let-your-hair-down kind of party.
Discuss: Yielding to temptation