Asian bonds: a core for driving the future

With interest rates remaining low, investors continue to look beyond traditional income sources, moving further out on the risk spectrum to meet their long-term targets.

“At one point during July 2016, more than US$13 trillion of global government bonds traded at negative yields. It has led investors across the world to look for alternative sources of stable income,” says Matthew J. Arnold, Head of ETF Strategy and Research APAC at State Street Global Advisors.

For much of 2016, Asian local-currency bonds were in a sweet spot as investors rotated into higher yielding emerging-markets assets. The election of Donald Trump as US President stalled the momentum, but the asset class continues to offer a lot to investors looking to diversify away from developed-market government bonds.

Higher yields, lower correlations

Asian local-currency bonds continue to look attractive due to their relatively higher yields. The Markit iBoxx ABF Pan Asia Bond Index, which invests in eight major Asian bond markets, had a yield of 3.38% as of end December.

The attraction is more than the potential for higher yields. “One of the key reasons for considering Asian local-currency bonds is the potential diversification benefits that the asset class brings to a multi-asset portfolio,” Arnold adds. “Asian local-currency bonds have lower correlations with global bonds and equities.”

Ng Kheng Siang, Asia-Pacific Head of Fixed Income at State Street Global Advisors, says investors have increased their allocations to Asian bonds also because of the fairly resilient fundamentals of Asian economies.

“Although there may still be volatility going forward, whether it is as a result of a Fed rate hike or profit taking or investors making asset allocations from time to time, in the medium to long term we think Asian bonds will continue to do well,” says Ng.

“For investors looking to fully benefit from the growing Asian economies in the longer run, Asian local-currency bonds may potentially provide investors with bond market returns plus Asian foreign exchange returns.”

Core foundation of Asian portfolios

Ng expects the demand for Asian bonds to continue. “Asian bonds will form a core part of asset allocation because Asian economies continue to grow, the Asian debt markets continue to expand, and the inclusion of more Asian bond markets into the global bond universe will naturally propel more investments into this part of the world.

“An easy and efficient way to access this asset class is through an ETF,” says Arnold.

The ABF Pan Asia Bond Index Fund (PAIF), managed by State Street Global Advisors, was the first ETF covering Asian local-currency bonds and holds mainly sovereign bonds from eight countries in Asia, including China.

“Like many other ETFs, PAIF enjoys the benefits of low cost, ease of execution and transparency. It is also the largest fixed income ETF in the region, with total assets of about US$3.7 billion. And with a total expense ratio of 19 basis points, it is a particularly cost-effective vehicle for a range of investors, large and small.”

Visit www.abf-paif.com/core to learn more about how PAIF can benefit your portfolio.

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This material may not be reproduced, distributed or transmitted to any person without express prior permission and may not be distributed and published in jurisdictions in which such distribution and publication is not permitted. PAIF is an authorized unit trust in Hong Kong and Singapore only. Authorization does not imply official recommendation. No action has been taken to permit an offering of units in PAIF other than those listed above. Past performance of PAIF is not necessarily indicative of its future performance. The prospectus for PAIF is available and may be obtained from State Street Global Advisors Singapore Limited (the “Manager”) (Singapore Company Registration number: 200002719D, regulated by the Monetary Authority of Singapore) and authorized participants. The value of PAIF and the income from them, if any, may fall or rise. The semi-annual distributions are dependent on PAIF’s performance and are not guaranteed. Redemption of PAIF’s units could only be executed in substantial size through designated dealers and the listing of PAIF on the stock exchanges do not guarantee a liquid market for the units, and PAIF may be delisted from the stock exchanges. PAIF may use or invest in financial derivatives. This advertisement is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong (“SFC”).

The views expressed in this advertisement are the views of Mathew J. Arnold and Kheng Siang Ng through the period ended 27 January 2017 and are subject to change based on market and other conditions. This advertisement contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Diversification does not ensure a profit or guarantee against loss.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

The Markit iBoxx ABF Pan-Asia Index referenced herein is the property of Markit Indices Limited and is used under license. The PAIF is not sponsored, endorsed, or promoted by Markit Indices Limited or any of its members.

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