Asian local bonds get bad rap from Western investors
Asia's local currency bond markets have been growing at a rapid pace, but foreign investor interest remains low, in large part because of a lack of familiarity with the asset class, according to fixed income experts.
The region's domestic bond markets have grown at a rapid pace over the last 10 years, with China’s LC bond market alone expanding 309% in that time period, from $2.2 trillion in March 2009 to $9 trillion in March 2018. However, foreign investors still don't greatly engage, in large part because they don't truly understand it, delegates heard at the 'Asian Bonds: Where to From Here?' event, held by AsianInvestor in partnership with SSGA on October 9.
“When you talk to the Western investor base, they seem to be still quite wary of deploying money here,” Manjesh Verma, head of credit sector specialists for Asia at Citi, said on the panel.
The further the investors are away from this market, the more alarmist they may be, agreed Yezdi Chenoy, Asia chief investment officer for Italian insurer Assicurazioni Generali.
“One of the things we need to do better is to market this part of the world to the West because some of it is perception management,” Chenoy told the audience.
The region’s fixed income markets have evolved substantially in the last few years, with investors having more access to bond markets in China and India, for example, and regulators creating more clarity around rules such as taxation requirements in China, he added.
Part of that marketing and education process involves walking investor clients step by step through the evolution and development of the regional market over the last few years.
“We are trying to share with [clients] in terms of how the bond market has evolved, how the Asian bond markets have come up from the Asian financial crisis, how it has been through the tech bubble, and how it has withstood the global financial crisis,” said Ng Kheng Siang, Asia-Pacific head of fixed income for State Street Global Advisors.
LIQUIDITY ISSUES
While Asian local currency bond markets could benefit from better investor education, there are key issues that present real challenges to investors, such as insufficient liquidity.
“Liquidity has improved, but I wouldn’t say that it has improved to the extent that it would make investors very comfortable about it – that’s definitely an area where much more needs to be done,” Citi’s Verma said.
There need to be incentives for more participants to get involved in local currency bond markets to make it a more liquid and vibrant market, Verma added.
However, the perception that there is low liquidity may arise from the fact that much of it is not observable, especially concerning the amount of local currency assets that regional insurers have on hand to invest in local corporate bonds. That said, asset owners said there is typically an ability to get into debt if they wish to.
“I think [insurers] have always got cash to deploy, so international investors who go into these markets and wish to exit and either take profits or cut losses, I think … there’s probably a willing bid or amount for those bonds,” said Paul Carrett, group chief investment officer at FWD Group.
The real question is one of willingness to accept the available pricing. And that depends on the availability of bonds in the secondary market, which can be hard to find, speakers added.
Look out for the second part of this story in the coming days.