Asia sovereign bonds have a comparatively attractive average yield of 5.5% for investment grade bonds, she said.
“It’s not a currency appreciation story nor a massive capital gain story. It’s a yield story at the moment.”
Capital gains for Asian bonds face limits because because central banks in Asian countries are much more cautious in cutting interest rates than their counterparts in the US and Europe, she said.
Regional sovereign bonds that she believes stand out include issues from India, Indonesia and the Philippines because they are less correlated to events in China.
The top two holdings of the firm’s Western Asset Asian Opportunities Fund, which invests primarily in sovereign bonds, are Indonesian sovereigns and offshore bonds from China, each accounting for 22% of the portfolio. India sovereigns get 16% allocation and the Philippines 10%.
Some exposure has slightly shifted from India to Indonesia, she noted, as India has the “key man risk” given the possible change of the central bank governor, Raghuram Rajan, in October.
On the other hand, Indonesia benefits from the strong driver of internal consumption and structural reforms, for instance in the infrastructure sector.
“Although its currency is commodity related, we believe commodities could be bottoming out and that would benefit Indonesia,” Stitt said.
In the Philippines, the yield of government bonds are slightly lower than those in India and Indonesia at around 5%, but the country has the advantage of being independent from China, she noted.
China is one of the key risks. If a lot of defaults happen within a short period of time, that could have destablising effect on all regional currencies, she explained.
To manage China-related risks, she said the fund prefers government-linked corporates or those involved in infrastructure businesses in Asia. “It means that we’ve got more sovereign risk rather than credit risk.”
