The survey1 reveals that close to 60% of respondents had an allocation to Asian fixed income and nearly all of these existing investors planned to increase or maintain their exposure in the next 12 months.
The key reasons for this growing appeal – higher yields compared to other fixed income assets and favourable long-term macro outlook of Asian fixed income. In addition, Asian bond markets are maturing rapidly, becoming more liquid and better integrated into the broader universe of global fixed income, most recently with the inclusion of Chinese bonds into major global indices. All of these factors are helping to fuel further demand.
PRIVATE BANKS TARGET ASIAN BONDS
Major central banks around the world have kept interest rates at or near historic lows for nearly a decade, triggering a global hunt for higher-yielding investments. Asian fixed income is providing investors with some respite. The survey results indicated that 18% of global institutional and private banking fixed-income assets are allocated to Asian bonds, of which 13% is in Asian credit and the remainder in government issues.
Asia ex-Japan investors showed the strongest demand, with local private banks apportioning 51% of fixed income assets to Asian bonds, and institutional investors earmarking 26%. Allocations from outside of the region are moderate but growing with 7% coming from Europe and the United States, 3% from Japan and 2% from Australia.
FOCUS ON ASIA
These allotments are expected to expand. Overall, 95% of existing investors planned to either increase (41%) or maintain (54%) their exposure to Asian fixed income over the next 12 months.
What’s interesting is that all of those surveyed in the US or Europe said they intended to retain or augment their Asian bond holdings during this period. This partly reflects the more accommodative stances of the US Federal Reserve (Fed) and the European Central Bank (ECB). The Fed left rates unchanged in early May, with its Chairman Jerome Powell stating that officials were comfortable with their current policy position.
Following a Eurozone economic growth downgrade by the International Monetary Fund, the ECB also held its policy steady at its April meeting. Meanwhile, ECB President Mario Draghi warned that recent data had confirmed slower growth momentum in the region.
In fact, only 5% of Asian fixed income investors participated in the study are expected to trim their exposure in the coming year. Meanwhile, around a quarter of survey respondents who had not invested in Asian bonds had plans to initiate an allocation to this asset class.
LONG-TERM STRATEGIC ASSET CLASS
Prevailing low yields in the US, Europe and Japan have benefited the Asian fixed income asset class. For example, within local-currency Asian government bonds, over 75% of those who responded to the survey stated a target of at least 100 basis points (bps) of yield enhancement over US Treasuries, while nearly one-third said they were looking for a pickup of over 200 bps.
The decision by investors to increase their allocations to Asian bonds is more than just a short-term yield play. Given the long-term growth prospects of the region, and decades of development and progress in Asian bond markets, these decisions point to a long-term strategic allocation to the asset class. Only 3% of participants with plans to increase or initiate allocations said these investments were tactical (of less than one year).
With no real evidence of a near-to-medium-term recovery in global rates, the more mature and easy-to-access Asian fixed income market will continue to be a vital source of yield for investors across the world.
Visit www.abf-paif.com* for our latest insights and investment ideas for Asian fixed income.
1 State Street Global Advisors commissioned Greenwich Associates to conduct a global study of 151 institutional investors and 36 intermediary distributors from Asia Pacific, Europe and the United States between October 2018 and March 2019.
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