When it comes to China, investors need to play the long game to find opportunities and should be ready to weather the negative impact of inflation on fixed income assets, panelists told the  Asia Financial Markets Forum 2021 in Singapore yesterday (October 27).

China, they agreed, was now simply too big to ignore.

“China is already the second largest bond market in the world,"  Liew Tzu-Mi, chief investment officer for fixed income at GIC told the forum. "Especially for long-term investors like ourselves, it is a very precious source of opportunity because of the scale and also the diversity.”

Liew Tzu-Mi, GIC

Promoting long-term sustainable growth, financial market stability, national security and decarbonization were the key themes all countries had been pursuing. However, in China these issues were being actively pursued.

“Take Evergrande for instance, it is about being able to allow for orderly restructuring, orderly defaults at the same time, to ensure that you have a proper pricing of credit risk in the system, but without necessarily destabilizing the larger market, larger economy, and that's what they're trying to engineer,” she said.

GIC has allocated 20% out of its total assets to Asia Pacific (ex-Japan), the second largest holdings after US funds which collectively hold around 36%. Fixed income contributed a total of 35% of its $740 billion in assets as of August. 

ALSO READ: What next as Evergrande misses second coupon payment?

Ng Kok Song, founding partner and chairman of Singapore-based Avanda Investment Management, on the same panel also shared the same bullish outlook on China.

“I think the next 10 years is going to be the era for the Asian markets," said Ng, who was group chief investment officer at GIC between 2007 and 2013.

He added that he believed Asian countries would take the lead in economic and capital market growth, compared with the US and European countries.

According to the latest report published by Eastspring Investments, the investment arm of Prudential, global investors remained bullish on Asian fixed income, especially China bonds despite heightened market volatility, 

Some 67% of respondents in Asia expect to increase their Asian fixed income holdings over the next year, and a further 11% were likely to increase their exposure in the next two years, according to the report.

Respondents in Asia, meanwhile, saw rising inflation, uncertain GDP growth, and tapering concerns as the key factors weighing most heavily on their fixed income portfolios.  

Over 70% of all respondents and 81% of respondents in Asia believed that Asian fixed income assets often provided higher risk-adjusted returns than those in developed markets.

“With Asia expected to remain the world’s growth engine, demand for Asian bonds will continue to be fuelled by Asia’s structural needs to finance and support infrastructure gaps, demographic shifts, and sustainable growth," Ooi Boon Peng, head of investment strategies at Eastspring Investments, noted in the report.

"While there is already a home bias for Asian fixed income amongst Asian investors, a maturing and diverse market continues to offer new and compelling investment opportunities,” the report wrote. 

Others, however, were of a more cautious cast of mind when it comes to China.

Robert Tipp, chief investment strategist and head of global bonds noted in PGIM's latest market outlook that China faced substantial risk of a severe hard landing if current policies were not eased.

INFLATION

Liew at GIC also highlighted the importance of understanding the market demand side when it came to inflation. 

“I think the important thing to realise is that it's not just a supply side issue, so people talk about Covid-19 related disruption, semiconductor issues or energy commodity supply side bottlenecks," she said.

"But I think what is perhaps much more important is to understand the demand side pressure (such as housing; labour), because that tends to be a lot more persistent.”

She said she believed that central banks today were much more willing to tolerate running the economy a little bit hot by putting more emphasis on growth as well as employment rather than just inflation alone.

"Investors should be more careful about where to invest and what is being priced in, and therefore selecting or constructing a portfolio that's able to weather the storm," she told the panel discussion. 

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