Asian growth story remains intact

Category: Asia, Hong Kong, Vietnam, U.S.A.

Southeast Asian fixed income market to remain positive in 2018

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RHB Asset Management, one of Malaysia’s three largest private fund management companies, expects the Southeast Asian fixed income market to remain positive in 2018.

“We expect the overall credit trend for the Southeast Asia market to be stable in the foreseeable future,” Michael Chang, chief investment officer of RHB Asset Management’s fixed income business, tells Asia Asset Management in an exclusive interview.

“Although the outlook on Southeast Asian countries’ sovereign credits may be constrained by pockets of structural weaknesses, the Southeast Asian growth story for the rest of the year and the next remains intact as the region continues to ride on a relatively strong economic growth cycle,” he adds.

In September this year, the Asian Development Bank revised up its 2017 and 2018 economic growth forecasts for Southeast Asia to 5% and 5.1%, respectively, from its previous projections of 4.8% and 5%.

Apart from the economic growth momentum, the region’s fixed income market is also expected to get a boost from various mega infrastructure projects, which will require financing.

“Infrastructure investments are receiving a big push from Southeast Asian governments, with state-owned enterprises gearing up aggressively to fund this spending, which will result in credit ratios staying elevated in the near-to-medium term,” Mr. Chang says.

Several of RHB Asset Management’s fixed income products have registered a commendable performance over the past five years. For example, the RHB Bond Fund posted a return of 28.35% against the benchmark’s 17.02%, and the RHB Islamic Bond Fund registered a return of 51.02% versus the benchmark’s 17.63%.

“We attribute our achievements to teamwork within the fixed income division and our entire team at large. Within the fixed income division, we run rigorous and robust credit research through our ‘in-house developed models’ before investing in corporate bonds. Thereafter, bonds that have been included to our buy list will constantly be on our credit surveillance,” Mr. Chang says.

“We also run an active investment strategy to generate alpha for our funds and clients. We will deploy an active tactical asset allocation strategy when market conditions warrant it or when we see value. This is crucial as financial markets have developed with clients having much higher return expectations, which emphasises that fixed income is no longer a passive investment.”

But he notes that it has become increasingly challenging for fund managers to find yield in the current low interest rate environment.

“In order to meet yield expectations, we have been deploying our investments in government bonds to capitalise on interest rate trends and capital flows. We are gradually seeing some uptick in USD [US dollar] bond yields, which is positive for portfolios if you are looking to invest. This is due to the US Federal Reserve rate hikes and plans to normalise interest rates as the economy continues to recover,” he says.

Other factors that have impacted the region’s fixed income market include surprises such as the UK vote to exit the European Union in a referendum last year, and the election of US President Donald Trump.

“These surprising events have created some volatility globally due to some uncertainties from the advanced economies. This has led to many uncertainties for Asian corporate bonds as well as the rest of the world. In November last year, we saw profound spikes in US Treasury yields and capital outflows from Asia back to the US equities market following Donald Trump’s political victory,” Mr. Chang notes.

“This impact also led to Asian central banks ensuring accommodative interest rate policies to mitigate and manage shocks to the capital market caused by these volatile capital flows. If these capital flows were left unchecked, it would disrupt the domestic liquidity of these economies by a rise in funding costs and thus tightening credit conditions which then impedes economic growth.”

Nevertheless, Mr. Chang still sees opportunities in the Asian corporate bond space.

“The region is now operating in a much healthier trade environment due to an increase in cross border flows, better access to credit due to the development of the domestic bond markets to promote financing, and healthier international reserves by some of the regional central banks operating in this region,” he observes.

As at September 30, RHB Asset Management had AUM of over 49.08 billion ringgit (US$11.63 billion), of which 21.13 billion ringgit was in fixed income.