There is a growing shift among Asian institutions to switch assets from European bonds, where yields are low and in some cases negative, into higher-yielding Asian debt, says Peter Ryan-Kane, Asia-Pacific head of portfolio advisory at investment consultancy Willis Towers Watson.
Both sovereign and corporate debt – on the local- and hard-currency side – are benefiting from the trend, he told AsianInvestor, which is already under way and expected to gain further traction.
"If you can get 4% or 5% annual yield in the current environment, you’re doing very well," Ryan-Kane said. Asian local-currency bond yields are generally offering around 4% before currency appreciation, and Willis Towers Watson expects Asian currencies to outperform sterling and the euro by 5% or so over the next year. That, combined with a little yield compression, could provide investors with 6% or more in returns, noted Ryan-Kane.
However, Guillermo Osses, head of emerging-market debt at UK hedge fund manager Man GLG, said last month that he thought Asian bonds were largely too expensive and that Latin American debt was a better bet. However, he has been allocating to Indonesian bonds.
Ryan-Kane agreed that Indonesian bonds were attractive, along with those from the Philippines. And, despite Indian market reforms stalling a little, domestic bonds there are worth a look, because yields are at decent levels and inflation looks under control, he added.
India's 10-year government bond yield stood at 7.103% on Friday, while on Thursday Indonesia's was 6.779% and the Philippines' 3.2140%, according to Trading Economics.
China, however, has major shadow-banking problems, and many investors believe this problem needs to be dealt with before they move into mainland credit, Ryan-Kane said.
Indeed, US fund house Invesco plans to invest in China’s newly opened interbank bond market this year with an initial focus on government and policy bonds, but is likely to avoid mainland corporate credit for at least 12 months.
Ken Hu, Invesco’s chief investment officer for Asia-Pacific fixed income, said he was hesitant on Chinese corporate bonds because of rising default rates and lower yields compared to offshore Chinese credits with similar maturities and credit profiles.
Europeans slow into Asian bonds
Meanwhile, European investors have been slow to pick up on Asian bond opportunities, said Ryan-Kane, but are allocating to Asia-based hedge funds.
That’s because many European investors hold bonds for macro-prudential reasons or to hedge their liability risk – which is in the same currency with a similar duration. So for them, if yields fall, it doesn’t matter so much because the rising bond prices (which move inversely to bond yields) offset the rise in the value of their liabilities, Ryan-Kane said.
But Asian investors have no obligation to hold European bonds, he added.
Still, European capital has been flowing into Asia, notably into the region’s big, well established hedge funds, said Ryan-Kane. In particular, European investors like the managers that take advantage of Asian macro fundamentals, he said.
He agreed with other industry experts that it was a good idea for Asian asset owners with traditional equity-and-bond allocations to switch more to hedge funds. Such strategies represent the easiest way to achieve some diversification and have shorter durations than other alternative funds such as real estate, infrastructure and private equity funds, he noted.