Western Asset bets on Asian corporate bonds

Default rates in Asia remain low, but current prices of Asian corporate bonds imply an unprecedented surge in failures, says Western Asset ManagementÆs fixed-income specialist.
The worst period of risk aversion is over and Asian corporate bonds now offer some of the highest current liquidity premiums with the best macroeconomic fundamentals, according to Western Asset Management, the global fixed-income manager wholly owned by Legg Mason.

ôAll sectors of Asian local bonds look attractive at current levels. Government bonds have rallied but monetary policy will likely remain loose and inflation should be dampened by lower commodity prices and weaker growth,ö says Singapore-based Rajeev De Mello, head of Asian investment at Western Asset. ôSovereign and corporate bonds will likely benefit as positions are reallocated between investors. Default rates in Asia remain low whereas the current prices of Asian corporate bonds imply an unprecedented surge in failures over the next few years. This large valuation gap appears to favour investors.ö

Western Asset Management believes that Asia is in a much healthier financial position now than it was during the 1997-1998 crisis. After all, countries have substantial foreign reserves and boast strong fiscal positions, companies have more robust balance sheets and banks are far sounder. Monetary policymakers also have room to reduce interest rates. This gives the region a better position from which to address the global slowdown. Asia will also be a beneficiary of lower food and commodity prices.

ôOur short-term outlook for currencies is more mixed as certain countries will likely allow their currencies to fall in order to soften the adverse impact on their export markets. However, massive monetary expansion in G3 countries should have an impact on their currencies relative to Asian currencies,ö De Mello says.

Western Asset management believes the expected decline in risk aversion in the next few months will also benefit those Asian currencies specifically hit in the recent months. Over the medium-term, Asia is likely to rotate its growth away from the export sector towards domestic sectors. As that happens, the attractiveness of weaker currencies to stimulate growth will diminish.

ôTherefore we remain positive on Asian currencies in the medium term. We have increased our exposure to corporate bonds and will continue to scale in issues and sectors where we see extraordinary value. With the recent sell-off, Asian corporate bonds currently offer significant opportunities in a range of subsectors and countries,ö De Mello says.

Western Asset Management has more than $585 billion in assets under management. Its parent, Legg Mason, has around $842 billion in AUM.
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