Asian private clients loath to ditch EM bonds

Asset and wealth managers are generally recommending allocating to equities over bonds this year, and many warn of the risks of emerging-market debt. Yet private bank clients in the region seem reluctant to sell fixed income assets, despite the global government bond rout sparked by Donald Trump's election as US president on November 8.

“We advise Asian clients to reduce exposure to fixed income, and we have to admit that we have very little success,” said Stephen Corry, head of investment strategy at Liechtenstein-based private bank LGT.

For 2017, LGT recommends Japanese equities (currency-hedged), US small-cap equities, real assets, and buying global value stocks (such as energy and financials) and reducing global growth ones (for example, IT and consumer staples).

Asian clients’ “love affair” with fixed income is particularly focused on EM credit, especially Asian bonds, but they don’t hold US Treasuries, said Corry (pictured below).

They are reluctant to move their allocations from bonds to equities, he noted, because memories of the 2008/2009 crisis are still fresh in their minds.

In addition, their experiences with fixed-income investments have been so good in recent years that it takes them a long time to make the switch, said Corry. From a risk/return perspective – measured by annual returns versus volatility – bonds have provided higher returns than equities over the past decade, he said.

However, bond bubbles tend to peak, at which point equity returns will rise, argued Corry, but that is “hard to explain to clients”.

JP Morgan Asset Management is also shying away from EM debt, said Leon Goldfeld, managing director for multi-asset solutions in Hong Kong. Despite EM bonds yielding more than their developed-market counterparts, he noted, the firm is reducing its exposure because of the higher risk of EM debt.

Overall, Goldfeld said JPM AM was long and overweight equities and long on US corporate, high-yield and investment-grade bonds.

Corry also likes the fundamentals of US bonds, but said their spreads had tightened substantially. “If the spreads widen, I would encourage my clients to purchase these, particularly if they have reduced exposure to fixed income assets with high durations,” he noted.

Citi Private Bank, meanwhile, suggests raising cash levels at the expense of bonds and equities.

The firm recommends almost doubling the cash allocation in a medium-risk portfolio to 3.5% from 2%, and reducing global equity exposure by 1% to 37.6% and global fixed income exposure by 1% to 36.8%. It also suggests adding a 0.5% allocation to commodities. Citi’s weightings for hedge funds (11.5%), private equity (5%) and real estate (5%) stay flat.

Though it is ramping down risk slightly in light of new policy uncertainties, Citi said it still saw wide valuation divergences across the world offering investment opportunities in select equity and fixed income markets, private equity and real estate (click on chart, right).