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Category: Asia, Global

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David Tan, Chief Investment Officer, Fixed Income, Asia Pacific Region, Allianz Global Investors (“AllianzGI”), tells Asia Asset Management how its Flexi Asia Bond strategy can achieve both high-yield and diversification for an investor’s portfolio.

Asia Asset Management: What does AllianzGI view as the current fixed-income opportunities in Asia?

David Tan: Currently we view the opportunities in India and Indonesia very favourably. The ten-year government bonds of both countries are currently yielding in excess of 8%1. India, in particular, has done very well following the elections. The results were much better than expected and supported a rally in the rupee which we were positioned for.

We have also been positive on Indonesia due to expectations of a positive outcome in the upcoming elections in July. We believe the Joko Widodo/Jusuf Kalla combination for president and vice president respectively, is very compatible in the sense that Mr. Widodo is more likely the people’s president and the vice president is going to be more business-oriented, and this will bode very well for Indonesia. More recently however, political uncertainty is increasing with Prabowo Subianto gaining popularity so we are monitoring the situation closely.

Being high-conviction managers, we have had fairly material over-weight positions in both India and Indonesia. However, we have reduced some exposure in Indonesia recently due to the increase in political uncertainty.

We currently also like the high-yield credit sector. With the year-to-date sell-off in the Chinese property market, there are now some interesting opportunities where valuations have become attractive relative to fundamentals and we may look to increase exposure selectively.

What has been the impact of last year’s so-called ‘Taper Tantrum’?

The developed markets had a good run in the last year or so post the Taper Tantrum at the expense of emerging markets which sold-off. But more recently, we are seeing increasing interest towards Asia again as Asian fixed-income valuations have become relatively more attractive. From a spread perspective compared to its US counterparts, Asian high-yield still provides over 300 basis points pick-up for single B-rated credits and around 140bps spread pick-up for BB-rated credits. With a backdrop of abundant liquidity and attractive relative value, we expect to see increasing interest in Asian fixed-income ahead.

What is AllianzGI’s perspective on the current interest rate climate and its effect on bond markets?

We believe rates will be lower for longer. Central banks are likely to be behind the curve, so we will not see a rate rise until maybe late next year or so.

What we need to take note of is that there is still an abundance of liquidity now and there could be even more going forward if the European Central Bank adopts some unconventional monetary policy measures. As a result, the search for yield will continue to be a key theme in markets, which will bode very well for Asian fixed-income where yields are relatively more attractive than developed market yields.

How can Asian fixed-income provide diversification for an investor’s portfolio?

Many Asian bond markets still have a relatively low correlation to G7 bond markets. This is because many Asian bond markets are still driven largely by domestic factors such as domestic growth and inflation, which can often be moving in different directions to G7 markets, as well as to regional markets. This provides good diversification opportunities in an investor’s overall global fixed-income portfolio.

How does AllianzGI differentiate itself on its fixed-income capability?

Our flagship Asian fixed-income strategy is not benchmark aware, although we use a reference benchmark (the HSBC Asian Local Bond Index) to gauge how we are performing compared to the market. This strategy can move up to 70% into high-yield bonds to achieve more attractive yields and invest across both US dollar and local currency bonds. On the other hand, we can also actively reduce risk by raising up to 50% in cash and/or by switching into government bonds to protect downside risk if we anticipate high volatility. Our approach is dynamic in that we have the flexibility to actively allocate across the various cycles of the macro environment taking advantage of the best opportunities in the market, rather than be constrained by benchmark weights. For example, in times of growth we can move into convertible bonds and in times of risk aversion we can switch into investment grade and/or government bonds or cash.

The Flexi Asia Bond strategy aims to tap into opportunities in Asia’s fixed income market through a flexible unconstrained approach:
  • Asia is the fastest growing region globally despite expectations for a moderation in the pace of growth over the next few years as Asian economies become more developed and urbanised
  • Improved financial strengths have led to rating upgrades of many Asian countries over the past decade. Asian markets will continue to see improvements in their ratings, which will support the potential capital appreciation of bonds (the most recent example being the Philippines)
  • The size of the Asian local bond market has more than doubled during the last five years
  • Our strategy aims to capture investment opportunities in the region by flexibly allocating assets across the entire Asian fixed income universe with the potential dual benefits of a regular income stream opportunity and risk diversification

For more information, please contact:
Elvin Yu
Head of Institutional Business, Greater China & South East Asia

1. Source of data: Bloomberg, as at 25/06/2014. Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities, nor investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. Investment involves risks, in particular, risks associated with investment in emerging and less developed markets. Past performance is not indicative of future performance. Investors should read the offering documents for further details, including the risk factors, before investing. This material has not been reviewed by the SFC in Hong Kong and the Monetary Authority of Singapore, and is published for information only, and where used in mainland China, only as supporting materials to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

Issued by Allianz Global Investors Hong Kong Limited.