EXCLUSIVE GUEST ARTICLE: The Sometimes Overlooked Potential Of Asian Fixed Income
The head of Asian fixed income at AXA Investment Managers gives his views on the region's bond markets.
Asia's equity landscape has been rocky in recent months and wealth managers are paying attention to the fundamentals of the region's fixed income space. Last month, for instance, the UK's Aberdeen Asset Management expanded its fixed income range with two Asian funds, stating that Asia is where growth and savings are being generated and where policymakers are largely on top of events. With developed government bond markets offering modest yields and credit spreads offering limited protection from default risk, the author of this article, Jim Veneau, head of Asian fixed income at AXA Investment Managers, explains why now may be a good time to explore Asian Fixed Income. The editors here are pleased to share this article with readers and invite responses; they do not necessarily endorse all the views expressed from guest contributors.
Between 2002-2015, a number of initiatives have contributed to the development of both the hard and local currency bond markets in Asia. This has helped reduce market barriers, increase diversity of bonds and issuers, improve liquidity, harmonise market practices as well as regulations and promote regional integration of trade services and capital markets.
Corporate credit, as it is priced off the sovereign credit curve, has also benefited from these structural improvements.
Asian economies are extremely divergent in nature. As such, it is not accurate to capture the improvements in Asia without going into detail. However, looking at the sovereign credit rating changes over the last 15 years (see below), summarises to an extent, the results of the ongoing fundamental improvements to Asian fixed income markets.
However, we believe the case for investing in Asian fixed income for the future rests on the long-term improving economic fundamentals of the various countries in the Asian region, some of these are explored below.
The case for Asian growth – five fundamentals:
1. Structural long-term GDP growth – potentially exceeding that of developed markets
Asia is now widely regarded as the manufacturing hub of the world. If the current growth rates in Asia are maintained, the Asian economies together would be expected to dominate global output over the next few decades. Asia’s majority working age population means a healthy consumer base for consumption of the increased output as well, which means less reliance on exports. Good corporate earnings translate into more capital for reinvestment and increase in tax revenues for governments. Together this could lead to additional spending and further fundamental improvements to infrastructure.
2. Large capital reserves – help in meeting external obligations
A centrepiece of the policy framework post the 1997 Asian financial crisis focuses on maintaining a healthy buffer of foreign exchange reserves and smoothing volatility in currencies. Typically foreign exchange reserves provide reassurance of a country’s capacity to meet its external obligations, maintain stable currency valuations and potentially absorb unforeseen external shocks or contingencies. Large capital reserves reduce the risk of another Asian crisis, and also improve the perception about sovereign strength, which should help lower the cost of borrowing over time.