Combination of healthy debt profiles, local currency strength stands in stark contrast to many developed markets
Global investment trends have aligned in clear favour of Asian debt markets, with low yielding debt from the unstable developed world proving no match for the booming emerging markets of Asia. Schroders sheds light on some of the key themes running through the market:
Asia Asset Management: What are the key trends in the Asian fixed income market right now?
Schroders: There is an increase in global and regional demand for Asian local currency bonds. Until the global financial crisis, many investors used to invest in Asian equities and balance their portfolios by investing in relatively safe US treasury bonds. With the weakness of the US dollar and the deterioration in the US government finances, there is a search for bond diversification which benefits many Asian countries.
In an environment of very low growth in the US, Europe and Japan, most Asian countries stand out positively thanks to their higher growth trends and better debt dynamics. The US, Europe and Japan would like to see their currencies weaken to help them recover. Asian policy makers have gradually shifted away from the mercantilist approach and are allowing measured appreciation of their currencies. Over the medium run, investors in Asian currencies and bonds will benefit.
Which products and markets are interesting?
Given the trends outlined above, we believe Asian bonds provide an interesting proposition for investors looking for more attractive yields and diversification from developed markets. With relatively stronger macroeconomic fundamentals and higher yields, Asian bond markets are likely to benefit disproportionately from renewed diversification flows from the developed markets, underpinning Asian bond markets. The likelihood of stronger global equity markets fuelled by flushed liquidity should also be constructive for Asian currencies, via portfolio flows into Asian equities. Asian credit fundamentals are stable, with corporates in the region generally possessing healthy balance sheets. Spreads are still wider than equivalent rated credits in the US so we see good medium-term opportunities in this space also.
What impact is an economic slowdown in China and India going to have on the debt markets?
We continue to believe that the risk of hard landing in China will be contained as the government has ample fiscal and monetary headroom to stimulate the economy. Fiscal measures announced thus far have been very measured and targeted and are coming mostly from front-loading infrastructure projects. As policymakers have become more focused on rebalancing the economy towards a more consumption-driven model, away from investment led growth, Beijing’s growth preference has shifted from quantity to quality. Slowing China growth has a bigger impact on the export-oriented economies (e.g. Singapore, Hong Kong, Taiwan, South Korea) given their higher share of trade in the past decade. On the positive side, the lower need for raw materials has had a cooling effect on commodity prices, which in turn is suppressing headline inflationary pressures in the region. The lower growth-inflation trajectory is bond positive in the near term.
India’s economy is much more domestically driven so the impact to other Asian markets is relatively limited. GDP growth has slowed sharply in India due to tight monetary policy and the weaker global environment. However, inflation (whether measured using CPI or WPI), despite moderating, has remained well above the comfort zone of the Reserve Bank of India, primarily due to the loose fiscal policy stance from the government and the weaker exchange rate. India’s economy also remains burdened by large fiscal and current account deficits, which limit the extent of policy rate cuts.
How have Schroders’ operations in the Asian fixed income market developed in recent years?
Schroders has a long standing commitment to the Asian fixed income asset class, having invested in Asian bond markets since 1998. Our first Asian fixed income fund has a track record of 14 years. Over the years, we have grown our resources, expanded our product offering and continually improved our back office operations to increase the efficiencies of investing in these markets as they develop. We now offer products across a broad range of strategies, including Asian local currency bonds, Asian credits, Asian absolute return, as well as investment grade only and high-yield products. More recently, we were amongst the first investors to tap the offshore RMB bond market in 2010. This year, we successfully launched a China high-yield fixed income product in Taiwan. We have grown from a team of 5 investment professionals at the start of 2005 to an integrated team of over 20 portfolio managers, credit analysts and dealers today, with presence in Singapore, Hong Kong, Indonesia, Korea, Taiwan and Japan.
Is the Asian high-yield boom going to continue for some time yet?
We expect Asian credit markets to continue to grow, as the secular trend will favour corporate credit investments in the low interest rate environment. The recent policy actions of the major global central banks have contained fat tail risks which is supportive of overall market liquidity. Asian corporate fundamentals remain stable with a benign default environment and the valuations of Asian credits remain attractive relative to similarly rated credits in the US. These factors should be supportive of continued demand for higher yielding investments.
