by Ernie B. Calucag
For the most part of 2010, the investment themes of near-zero monetary policies and liquidity injections have remained the order of the day. As the developed world struggled to keep growth alive by fuelling asset prices, investors saw a better world in emerging markets, particularly Asia, as their destination of choice for their investments.
That new and better world is most evident in the fixed income markets. Not so long ago, there was a definite distinction between the bonds of OECD countries and those of emerging markets, but now that distinction has clearly become blurred.
Analysts say the trend is expected to continue in 2011, as high struc- tural growth in the region will attract more investors in search of high returns to pour more capital in Asia.
“Looking at Asia, the economic outlook is very favourable and the fiscal situation is good. As a bond investor, you want to ensure that governments can repay that debt obligation going forward. The debt sustainability measures are much more favourable here in Asia compared to Europe and US,” said Hon Cheung, Regional Director- Asia, Official Institutions Group, of State Street Global Advisors (SSGA).
“The Asian currency bond market in our view represents an interest- ing asset class for the medium- to long-term,” he added.
Data from Asian Development Bank (ADB) revealed that foreign investors now own 28.3 per cent of Indonesian government debt, 18.1 per cent in Malaysia and 8.7 per cent in South Korea as well as 4.2 per cent in Thailand. The best-performing bond markets as at the third quarter of 2010 have been Indonesia (up 26.7 per cent), the Philip- pines (20.4 per cent), Thailand (18.1 per cent) and Malaysia (14.4 per cent).
As investors chase Asian currency bonds next year, Henderson Global Investors believes the bias will be towards corporate bonds as companies are awash with cash.
“With low interest rates likely to persist for some time, companies could look to utilise this cash to grow (mergers and acquisitions) or invest (capital expenditure). In this current low-yield environment, we favour being overweight on corporate credit relative to government bonds, where the additional yield is attractive at a time when corpo- rate balance sheets and profitability have improved dramatically,” Henderson said in an e-mail to Biz Daily.
According to ADB, a total of US$1.56 trillion of bonds issuance out of the US$5.1 trillion outstanding as at the third quarter of 2010 was in the form of corporate bonds, where issuance jumped by nearly 24 per cent year-on-year.
Meanwhile, for government bonds, analysts are placing their bets on bonds issuance in Singapore, India and the Philippines. A report by DBS Research showed that they expect a return of 0.8 per cent for 1Q2011 for Singapore bonds, 1.12 per cent for Philippine bonds and 5.2 per cent for Indian bonds.
The Issue of Hot Money
With investors’ huge appetite for Asian bonds in 2011, analysts warn against possible risks as the “smaller” Asian credit market remains susceptible to activities in the West. In particular, slower growth in the western world will spill out on a more global basis for 2011.
As such, investors have to watch out for possible asset price bubbles in the region. Property prices, for example, have heated up in markets such as Singapore, China and Taiwan. Geopolitical risks and inflation concerns are also potential downside risks.
Given the still uncertain outlook for 2011, Hon Cheung of SSGA said it is prudent to remain diversified across core asset classes.
“The market is still very uncertain right now. There are still a lot of unresolved issues, in Europe, in US, the QE2. So in this kind of environment, the best strategy is diversification,” he said. “For us, there is definitely a role for all of these assets whether cash, bonds or equities, and investors should calibrate their holdings based on their own levels of risk tolerances. Diversification is about creating an asset allocation that is relevant for your particular circumstances.”
