APAC asset owners to raise Asia fixed income bets as US rates fall
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Asset owners and managers in Asia Pacific favour Asia ex-Japan bonds as they plan to increase fixed income exposure over the next 12 months amid falling US rates, according to a State Street Global Advisors (SSGA) survey released on Tuesday.
Investors in the Asia Pacific region plan to allocate nearly 46% of their assets to fixed income over the coming year, up from 37% a year ago, with the majority of their fixed income assets already invested in Asia ex-Japan bond markets, according to the SSGA survey.
The survey, commissioned by the ABF Pan Asia Bond Index Fund earlier this year, polled 600 asset owners, asset managers, family offices, private banks, and commercial banks across Asia Pacific.
It revealed investors plan to allocate 28% of their fixed income investments to Asia ex-Japan in the next 12 months, up from 26% last year.
Over the next 12 months, insurers will increase their exposure to Asia ex-Japan bonds by 1.5%, pension funds by 1.2%, and family offices by 2.3%.
“Apart from home bias, Asia's robust economic backdrop is boosting Asia-Pacific investor sentiment. The growing allocation to Asia ex-Japan fixed income among Asia-Pacific investors underscores a growing confidence in the region's fixed income markets as a source of stable returns,” said Marie Tsang, SSGA’s fixed income ETF strategist for Asia Pacific.
STRONG ECONOMIC BACKDROP
“Asia is potentially in a better place with regard to the control of inflation compared to the US and other developed markets. [There is] definitely more opportunity for central banks to take a more accommodative stance,” Tsang told AsianInvestor.
She noted Asia ex-Japan bonds' superior risk-adjusted returns and improved sovereign ratings compared to developed markets, noting that US Treasuries and European government bonds have tended to see deteriorating or stagnant ratings.
Asian policymakers have been navigating the Covid-19 environment and the inflationary environment “very well”, which also boosted investor confidence. The region's diversifying investor base with varying objectives and risk appetites also reduces market volatility, as they are less likely to move in the same direction, Tsang noted.
As the long-awaited Federal Reserve rate cut finally arrived last week after delays, she said the interest rate reduction boded well for Asia-Pacific local bond holdings.
“This could be the moment that they’ve been waiting for to add to Asia bonds,” she said. “Not only does it mean [favourable conditions for fixed income] from a bond pricing perspective, Asian central banks [will also] have more latitude to cut rates now that the US Fed has begun doing so.”
A few hours before the Fed's decision, Indonesia's central bank, Bank Indonesia, was the first to respond, cutting its interest rates by 25 basis points to 6% - its first reduction since 2021.
Noting that investors surveyed focused on local currency bonds in Asia, Tsang expects continued Southeast Asian currency appreciation against the US dollar amid falling rates, strengthening the case for Asia ex-Japan bonds.
FOCUS ON QUALITY
According to the survey, most Asia-Pacific investors (41%) use bonds as an income generator, followed by 31% who are seeking diversification.
Over half of the surveyed insurers and pension funds implement their bond investments through direct exposure. The larger the asset owner, the stronger their tendency to invest in bonds directly, according to Tsang.
Most are moving towards higher-quality bond exposures, as they cited recession and inflation as their biggest concerns, followed by geopolitics and currency depreciation, the survey showed.
They also tried to build a more diversified bond exposure to different Asian markets to effectively mitigate risks, Tsang said.
In terms of duration, the six- to 10-year range emerges as the sweet spot for Asia-Pacific asset owners, especially insurance companies and pension funds,
This is because the six to 10-year duration is less sensitive to interest rate changes compared to longer-duration bonds, while still offering a decent duration exposure, yields and price appreciation prospects when rates come down further in the future, Tsang noted.
“[The duration of] six to 10 years is probably in that sweet spot where it has a responsiveness to interest rate changes at a time when investors are contemplating that, when Asian central banks have more latitude to cut. And it is not too long from the perspective of interest rate volatility dominating the picture,” she said.
Insurers tend to spread across different maturities, while pension funds may allocate more to longer-duration bonds to match long-term liabilities, she added.