Despite liquidity and currency risk concerns, the pan-Asia bond market has developed to the point that local-currency debt now offers investors meaningful access to yield and diversification, said Kevin Anderson, Asia-Pacific head of investments at State Street Global Advisors (SSgA).
The region’s GDP growth outlook is relatively positive, as compared to the US – which faces tapering – and Europe, which is struggling with deflation, he noted at AsianInvestor's recent Asian Investment Summit.
The east Asian debt market – comprising China, Hong Kong, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand – has reached $7 trillion, and the debt-to-GDP ratio in the region has held stable at around 56%, added Anderson.
Meanwhile, the region has stabilised since the Asian financial crisis, partly because governments there implemented far-ranging policies in the wake of the meltdown, he argued.
“One of those [developments] is local-currency debt. In 1997-98, Asia was more reliant on hard-currency debt denominated in US dollars," he said. "That could be a problem if your economy comes under strain and you have to maintain a currency peg."
The growth in local-currency debt has helped countries to better manage their economies by creating more freedom for the setting of interest rates and macro policy, Anderson noted.
This has instilled investors with confidence. “As a result, foreign ownership of debt is quite high. Despite media coverage of tapering, it remains at about 30% in Indonesia.”
Although there have been significant outflows from Asian fixed income over the past six to 12 months, Anderson said this was mainly down to retail investors reducing their exposure. “Institutional investment is more sticky, and these investors maintain more structural positions in emerging markets."
Liquidity remains an issue, though, because Asia comprises a patchwork of small local-currency corporate bond markets, with Hong Kong and Singapore the most developed. That includes China, which, though it is Asia’s largest debt market, is restricted.
“Asian sovereign liquidity is not as high as in the US, UK or Germany. They have tight bid-ask liquidity, maybe 1-2 basis points in yield terms, which for a 10-year bond translates to about $0.10 cents,” said Anderson.
“Hong Kong is one of the less liquid markets as it has a lot of small issues — for a 10-year bond that’s maybe $0.25-$0.40 in the bid-ask spread, $0.10-$0.15 for Singapore.”
But as China continues to liberalise its capital markets, investors in offshore debt could move onshore, Anderson said. That process could accelerate if transparency and corporate governance improves.
“Many Chinese companies don’t have access to a breadth of execution venues,” he said. “And there are few non-Chinese players trading in these securities.”
Noting country-specific and currency risks and liquidity and access issues, Anderson argued a pan-Asian asset allocation could provide diversification away from US tapering and anaemic European growth.
“You may not want to invest in Thai or Malaysian bonds as a single-country opportunity, because they are outside your home market, and you may not have the experience to access those markets individually,” he said, “but a universe that includes all those bond markets could be pretty meaningful.”
