Baring Asset Management intends to expand its Asia fixed-income business by adding new products and marketing existing ones to new channels, says Sean Chang, head of Asian debt investment in Hong Kong. He joined the firm in May from HSBC Global Asset Management.
Chang says the Asia bond capabilities have emerged from existing global teams covering global and emerging-market fixed income.
The firm’s Dublin-domiciled Asian Debt Fund, a Ucits product for which Chang is lead manager, has recently been registered with Hong Kong authorities. Chang says the firm is considering whether to create single-country bond products as well.
He is optimistic that the growth of Asian sovereign and credit markets, and the region’s favourable fundamentals, will make it a core allocation for global investors. “We should see more flows to Asia for diversification and risk optimisation,” he says.
In addition, he believes Asian bonds are set to provide attractive capital gains. Recent moves by the People’s Bank of China to reduce interest rates are likely to trigger additional efforts by Asian central banks to stimulate growth, Chang says.
On June 7, the PBoC lowered its one-year benchmark lending and deposit rates by 25 basis points each, to 6.31% and 3.25%, respectively. It is expected to cut more this week. This illustrates the ‘dry powder’ that Asian central banks possess, in stark contrast to developed-country monetary authorities mired in zero interest-rate policies.
“This will be good for bondholders, who can capture those capital gains,” Chang says. He predicts several markets such as Korea will follow course this year, although those places with higher inflation, such as Indonesia and the Philippines, may not have that luxury.
Asia’s growing scale also makes it capable of accepting greater flows from global investors. Its US-dollar denominated issuance is now around $7 trillion outstanding, double the size of Latin America and quadruple that of central and eastern Europe. Local-currency markets in Asia are even bigger – China’s alone is $3 trillion.
With central-government debt-to-GDP ratios around 30-50% across the region there is plenty of capacity to issue more debt.
Asian fixed income does pose challenges to global investors, and Chang says most governments are trying to improve things such as transparency.
For example, although central-government debt-to-GDP levels are modest, there is often a lack of clarity about how much debt is incurred at the local level. It is the task of governments around the region to come to grips with total debts, and make that more transparent to global investors.
The expansion of China’s QFII quotas is helpful but not enough, Chang says. Global investors still face capital controls. “Yes there’s QFII, but clients want to know, how effective will their investment in China be?”
As a result, however, he sees more demand for offshore CNH markets, versus onshore yuan markets. Overall China represents a big, AA-rated market, with rates expected to provide capital gains as well. But legal issues, lack of transparency, and capital controls make the onshore yuan market difficult or unattractive to many international investors.
Dim-sum bonds’ liquidity and transparency are improving rapidly, making them a more viable substitute for onshore exposures.
Chang says the two markets are beginning to converge. He predicts that, just like the dollar and eurodollar markets, onshore and offshore renminbi bonds will soon trade along nearly identical yield curves. Chang’s own portfolio takes CNH positions that seek to exploit current mismatches vis-à-vis onshore markets.