On the road to recovery
Nomura Asset Management (Nomura) was once again a multiple award winner in this year’s Asia Asset Management 2021 Best of the Best awards, walking away with a total of six performance awards in the following fund categories: Asian Bonds (3 years); Global Aggregate Bonds (3 years); Global Emerging Markets Debt (3 years); Global Equity (3 years); Global Multi-Asset (3 years); and US High Yield (10 years).
Portfolio managers Simon Tan and Takashi Mishima both expect the global economy to accelerate in the second half of the year as service consumption begins to recover and the effect of vaccination rollout begins to calm fears of Covid-19 infection.
The state of the US economy and potential changes in Federal Reserve (Fed) policy will no doubt have a major impact on global markets, with rising upside risk to inflation and risk to growth both likely should the Biden administration choose to implement further fiscal or tax measures. Indeed, both the supply-demand gap and inflation expectations are indicating a risk of accelerated inflation. In addition, upward pressure on wages is likely to result in a rise in labour force participation rates alongside economic recovery.
The house view from Nomura however is not to expect inflation to rise dramatically and that it should remain in a range that does not require the Fed to act aggressively to contain it.
“Given the potential short term overshoot in the headline CPI figure and the global economic recovery, the inflation expectations of market participants are likely to increase and there will likely be continued upward pressure on global government bond yields,” says Tan. This, he adds, will have a negative impact on rates sensitive bonds such as longer duration bonds and/or better credit quality bonds with lower yield and spreads.
“We believe there will be greater demand for fixed income paper that better insulate investors from a rising yield environment. Lower quality investment grade paper and better quality high yield will thus benefit from a continued search for yield and we are also likely to see an increase in demand for floating rate bond.”
Implications
Country and sector allocations will continue to play an important role in Nomura’s strategy. Within the higher grade Asian bond space value is being seen in Chinese government-related entities and the China financial sector, where the economy showed strong recovery last year and where Nomura continues to assess its fundamentals as strong.
That said, as the portfolio managers point out, the pace of spread tightening in Chinese high grade bonds was slower than those of other Asian countries as global investors reduced exposures to high profile Chinese bond issuers due to the escalated tension between China and the US.
“We expect these sectors can outperform in the medium term, as Chinese entities are key investors in these sectors and we expect the strong demand from them will continue going forward. In the financial sector, we believe that financial leasing companies, which underperformed last year due to the large exposures to aircraft leasing, will outperform given that they are eligible for support from parent banks, and that issuers will benefit from the recovery in the airline industry,” notes Mishima.
With currency allocation not a major source of Nomura’s performance, Tan and Mishima agree that USD and other currencies fluctuations are unlikely to affect their investment strategy, as most of Nomura’s investment exposures are USD denominated bonds. However currency fluctuations may affect the fundamentals of each company they invest in. Some issuers, such as Indonesian companies, do not fully hedge their USD or foreign currency funding and currency mismatch can affect their fundamentals.
“This is just one reason why we carefully analyse the funding strategy of each company before we invest,” says Tan.
Asia credit
As a cheap alternative relative to its developed market and emerging market peers, investment in Asia credit also scores high, offering a “decent spread to compensate investors from a rising yield environment.” Thus Nomura’s portfolio managers expect Asia credit, both investment grade and high yield, to be strongly supported by investors looking to position themselves in fixed income assets that are better insulated from a rising yield environment.
Nomura AM’s Asia investment grade strategy is almost 100% investment grade (no high yield components) compared to other similarly-labelled strategies in the market. Nomura believes it is well-placed to achieve positive results
To conclude: “The growing Asian credit market presents plenty of opportunities to find anomalies in individual credits. Our expertise is to identify such anomalies through a combination of quantitative and qualitative analysis. Thus our highly experienced investment team have been able to achieve excess returns without taking too much risk on interest rates or spreads.”