Asian Bonds: Forget trade wars and focus on EM opportunities
As an increasing number of global investors have sought refuge in cash as a safe harbour from market volatility and uncertainty over US-China retaliatory trade wars, foreign investors withdrew around $19 billion from the region’s emerging markets (EM) in the first six months of 2018, a capital flight not seen since 2008.
The region’s key fund managers and asset owners recently gathered for two landmark forums in Hong Kong and Singapore, to explore the outlook for local currency bond markets.
Speakers at the Asian Bonds: Where to From Here? forums included:
- Andre de Silva, head of global EM rates research, HSBC
- Gerard Daniel, head of advisory solutions, Asia Pacific, State Street Global Exchange
- Kyle Hung head (external) at the Hong Kong Monetary Authority
- Dwyfor Evans, managing director, head of Asia Pacific macro strategy, State Street Global Markets.
- Kheng Siang Ng, Asia Pacific head of fixed income, State Street Global Advisors
- Paul Carrett, group’s chief investment officer, FWD
- Sean Chang, head of fixed income with Ping An of China Asset Management (Hong Kong)
- Yezdi Chinoy, regional chief investment officer - Asia, Assicurazioni Generali
- Kenneth Hui, senior manager, market development division, Hong Kong Monetary Authority
- Manjesh Verma, head of credit sector specialists for Asia, Citi
- David Chua, head of investment strategy, Investment, Prudential Assurance Company, Singapore
- Clifford Lee, managing director and global head, fixed income, Treasury & Markets, DBS
- Liew Tzu Mi, chief investment officer, fixed income, GIC
- Kiyoshi Nishimura, chief executive officer, Credit Guarantee & Investment Facility
- Chew Qi, head, regional development division, international department, Monetory Authority of Singapore
- Jack Ko, executive director, APAC SPG Equity Solutions, Securities Division Goldman Sachs
Moderator: Richard Morrow, Editor, AsianInvestor.
The general consensus gathered at the forums on October 9 and 11, 2018, is that fund managers are still positive about local bonds, believing performance and opportunities will continue over the long-term.
Key regional initiatives mean fundamentals have improved and even strengthened since the Asian financial crisis but liquidity, lack of information and ratings credibility all hinder investment growth.
Source: Asia Bonds: Where to From Here? Hong Kong forum, 2018
Not all segments of this market will perform well, but star performers like Korea and Thailand will continue to add sparkle and diversification to funds. Adding to the positive outlook, was the widely held belief that trade issues are overrated.
Concerns about China are a little bit overplayed. We think the China story will be a good, positive story,” said Dwyfor Evans, managing director, head of Asia Pacific macro strategy, State Street Global Markets. “2017 was a very strong year with very low volatility and no surprises, but many market narratives have changed in the past 6-9 months. 2018’s shifting market drivers include firmer inflation trends ongoing and turbulence in emerging markets.”
Sean Chang, head of fixed income with Ping An of China Asset Management (Hong Kong) echoed Evans’ sentiments: “People are seeing too much in trade wars. There are a lot of other developments going on, look at projects in Guangdong and Belt and Road projects where there’s a lot of interesting ideas, and China’s putting a lot of exposure into these regions.”
WHAT A DIFFERENCE A YEAR MAKES
After being overweight in 2017, fund managers have turned defensive. As the sector skewed toward selling, investors are seeking refuge in cash, resulting in portfolios now regarded as underweight in EM bonds. While inflation is rising, it’s still contained, although systemic risks including geopolitics and global monetary policy have entered the 2018-2019 mix, creating, as State Street Global Exchange’s Singapore-based head of advisory solutions, Asia Pacific, Daniel Gerard sees it, confusing signals.
"One thing we can all agree on is that investing is going to get really hard in the coming year,” he says.
While the road ahead gets tougher, opportunities will be unearthed. Asian currencies still outperformed their EM peers notes Kheng Siang Ng, Asia Pacific head of fixed income, State Street Global Advisors.
"In general, higher yields are on offer in Asia relative to the developed world. Credit spreads are widening but Asian local currency bonds outperformed emerging market bonds during turbulent times. Asian bonds have lower volatility and better returns/risk ratios and they are a good diversifier in global portfolios.”
FOCUS ON LIQUIDITY
High yields were the top attraction for Asian fixed income investment with China as the major drawcard as voted by the Hong Kong forum’s attendees. GIC’s chief investment officer, fixed income, Liew Tzu Mi summed up investor sentiment. “Asia is very exciting. Over the next 20 years we’ll see significant development and deepening of markets and a lot of opportunities. The number one challenge is liquidity; the availability of hedging instruments in Asia is still very limited,” says Liew.
The tendency of local investors to “take and hold” is actually contributing to liquidity issues, as DBS’s Clifford Lee, managing director and global head, fixed income, Treasury & Markets puts it: “Every time we talk about liquidity, we just assume there aren’t any buyers but in Asia there aren’t any sellers. Liquidity in the system is outpacing supply,” Lee says.
One reason for the lack of bond issuances is the strength of regional banks says Credit Guarantee & Investment Facility’s chief executive officer Kiyoshi Nishimura. “Regulators should think about how to balance the market and introduce regulations to discourage bank lending, to encourage the bond market.”
David Chua, head of investment strategy, Investment at Prudential Assurance Company in Singapore agrees. “Asia’s governments have a big part to play in helping shape the bond market. For example, Singapore’s government is actively trying to solve supply and demand for issuers as well as buyers.”
Standardising regulations within ASEAN could help with cross-border investment and given its dominance in the region, Manjesh Verma, head of credit sector specialists for Asia at Citi believes China could do more about ratings. “It’s done a lot to improve resolution and bankruptcy provisions but there needs to be more clarity about the flow of capital.”
China’s efforts to encourage foreign investment are proving effective says Yezdi Chinoy, Assicurazioni Generali’s regional chief investment officer - Asia: “There’s more clarity and certainty now and Western investors are coming in because they understand the risk/reward ratio.”
RESILIENCE AND UNITY
Much of the resilience being shown by Asia’s bond market is down to forward thinking. Since the early 1990s, the Executives’ Meeting of East Asia-Pacific, a conglomerate of 11 central banks (Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand) have worked together to develop the local currency bond market, launching both the Asia Bond Fund (ABF1), followed by ABF2, which comprises the ABF Pan-Asian Bond Index Fund (PAIF) and eight single market funds in local currency denominations. PAIF is listed in Hong Kong and Tokyo.
EMEAP results are significant. Kyle Hung head (external) at the Hong Kong Monetary Authority says the market has expanded eightfold - between 2003 when ABF1 was launched, and 2017. EMEAP members continue to explore ways in which the ABF can further enhance local-currency bond market development regionally, including the July 2018 launch of the PAIF securities lending programme which aims to deepen liquidity in the secondary markets of Asian local currency bonds.
Hung says although Asia is still under represented in major bond indices, an increasing number of pension funds and insurers are now investing in the region.
“One of the great achievements in the past 20 years is the development of Asian bond markets,” acknowledges FWD Group’s chief investment officer Paul Carrett, “but what we’d like to see now is more diversity.”