Asian life insurers are poised to boost their exposure to emerging-market bonds, following Britain's June 23 vote to leave the EU raising expectations that global interest rates will remain ultra-low for even longer, argues Richard House, head of EM debt at Standard Life Investments.
Following six successive quarters of outflows, emerging markets saw a rally in demand in the second quarter of this year that is tipped by many to continue. Institutions such as insurers can take months to make significant allocation shifts, but industry experts from firms such as Amundi and Man GLG argue that both EM debt and equities are due a sustained comeback.
“The theme of searching for yield has triggered flows into EM and credit markets in the past three months,” said House. “One implication of the Brexit vote is that [global] interest rate will be kept lower for a longer time than investors previously thought.”
While Asian sovereign wealth funds and central banks have long been investors in EM assets, he noted, now life companies in the region are also becoming big buyers of EM bonds, particularly Taiwanese life insurers.
EM debt managers attracted $1.2 billion of net inflows from institutions globally in the second quarter, after six quarters of net outflows from the last quarter in 2014 to the first quarter of 2016, according to the latest available data from eVestment. That said, insurers worldwide continued to pull money from the asset class, withdrawing a net $547 million in the second quarter.
Between July 27 and August 17, EM bond mutual funds and exchange-traded funds saw average weekly net inflows of $870 million, while EM equity funds saw average weekly net inflows of $930 million, said a report by the Institute of International Finance released on August 22.
Data from Bank of America Merrill Lynch supports this trend: global investors have poured a total of $20 billion gross into EM bond funds in the seven weeks between July 4 and August 19. The bank did not provide data on net flows.
House said investors with long-term liabilities were shifting towards higher-yielding fixed-income investments and away from developed-market government bonds, an ever-larger proportion of which are offering negative yields. EM dollar bonds with 7.2-year duration are offering yields of 4.57%, while local-currency EM bonds are offering 5% for 6.8 years' duration.
Other factors have also supported EM sentiment, noted House: they include macroeconomic improvements in several emerging countries, such as Brazil and Indonesia, in addition to what some see as the bottoming-out of the prices of certain commodities.
Taiwanese insurers – which can invest 45% of their AUM overseas – are particularly keen on foreign fixed income, including EM bonds, noted House.
The biggest local life insurer, Cathay Life, has said it plans to buy more offshore debt, including EM bonds, if they satisfy its risk-adjusted yield assessment, as reported. Other big Taiwanese players, Fubon Life and Shin Kong Life, are also moving to build their exposure to overseas fixed income.
However, Shin Kong Life will not overweight EM debt, said vice president Lin Han-wei in May, and will only buy bonds issued in stable markets and by highly rated entities.
Fubon Life, meanwhile, will continue to overweight foreign investment-grade bonds, with a focus on North American issuers, said senior vice president Raymond Lin in May.