Asset owners investing into Asian local currency bonds face several challenges to doing so. Some include liquidity issues, but other challenges include a lack of reliable credit ratings. However, these should be resolved as more money enters the region, predicted investors and market experts.
Speaking at AsianInvestor's Asia Bonds: Where to From Here? event on September 9 in Hong Kong, fixed income market participants discussed the need to improve Asia’s fixed income rating processes, especially given the fact there are 14 rating agencies alone covering China, Indonesia, Japan, Korea, Malaysia, Philippines and Thailand.
“We don’t have a uniform, recognised rating methodology,” said Generali’s Asia chief investment officer, Yezdi Chenoy. That makes it more difficult for asset owners to ascertain the risk of investing into the local currency bonds of certain companies.
Having a better default resolution mechanism in place is another key issue, said Manjesh Verma, head of credit sector specialists for Asia at Citi, though he added that a lot has already been done in China.
“Foreign investors who participate in [China] seem to be growing much more confident compared to what used to be the case three to five years back, so improvement and evolution of the bankruptcy regime – that is one key aspect,” he told the audience.
Doing proper research on the sheer number of bond issuers presents a challenge for investors as well, particularly when it comes to markets like China, which are still relatively young.
“There’s not going to be a huge amount of people with 30 years of experience in a market that’s five years old, and so you need people who are street-wise in those sorts of markets as well,” added Paul Carrett, CIO of Hong Kong-headquartered life insurer FWD.
The decision by Bloomberg to add Chinese local currency government and policy bank securities to the Bloomberg Barclays Global Aggregate Index starting in April 2019 should help to push Chinese regulators to address some of these issues, said Owen Murfin, investment officer and institutional fixed income portfolio manager at MFS Investment Management.
“Essentially, they will have the scrutiny of Western managers who effectively will not be able to not hold Chinese as bonds as part of their clients’ portfolio … and so from that point of view there will be more scrutiny on the operational procedures and settlement procedures associated with buying local bonds,” Murfin told AsianInvestor.
China will represent just over 5% of the index by the end of the 20-month inclusion process, and that should be a positive for local liquidity as well, he added.
The impending index inclusion is also generating more interest from investors from outside of the region, particularly from Europe, added Ng Keng Siang, head of Asia Pacific fixed income at fund house State Street Global Investors.
And with the continued growth of the Asian bond markets, especially in China, global investor interest is picking up steam.
“Global investors, when we talk to them, more and more of them are looking to deploy their money in China – rules are being changed, regulations are coming into play, and we think these are all extremely positive,” said Citi's Verma.
While Asia's local currency bond markets have been growing at a rapid pace, foreign investor interest remains low, in large part because of a lack of familiarity with the asset class.