“If you look back at the historical performance of Asian local currency bonds, they have been generating close to a 6% return on a per annum basis¹,” Ng explained.
Regional reform momentum
Returns of the Asian local currency bond markets have mainly been driven by currency appreciation, as well as by ongoing improvements in the underlying markets.
“For instance,” said Ng, “we have seen economic reforms in Asian countries, which have led to rapid improvements in fundamentals. These contribute to the stability in the growth of the Asian economies, as well as the further deepening of the Asian debt capital markets.”
He is convinced these factors alone will continue to drive investors’ confidence in this region.
One major development is the inclusion of the Chinese fixed income market in the global bond universe
“We have also witnessed that investors’ inflows into Asia have been increasing at a very steady pace,” he added.
In the long run, therefore, the rise of Asian economies and the Asian bond markets will feature as part of the core allocation of global investors.
Beating the bond drum
Against the backdrop of robust economic growth in Asian economies in 2017, plus the modest uptick in inflation, SSGA expects that central banks in Asia will gradually tighten monetary policy.
“While we don’t think this will be the start of a major bear bond market, we expect that the rise in Asian bond yields will be gradual,” explained Ng.
At the same time, the firm anticipates that Asian currencies will continue appreciating albeit at a more modest pace compared to 2017. “And we will be looking at investors getting into Asian bonds to invest in the local currency bond markets over a longer time horizon,” he added. “This would allow investors time to reap the benefits of the appreciation of the Asian local currency bond markets.”
There are also some opportunities in pockets of Asian markets. “For example, we are looking at the Korean bond market, which has priced in some rate hikes at the moment. But we expect the bond market will reflect a more gradual pace for interest rate hikes over time.”
Another major development is the inclusion of the Chinese fixed income market in the global bond universe – one of the major developments that global investors are closely monitoring. “As such, we expect that the overall sentiment towards the Asian fixed income market will remain positive,” added Ng.
To avoid being caught out with their bond allocations, Asian investors should look out for a swing in investor sentiment. “We think this will be one of the biggest market events that investors will need to pay attention to,” said Ng.
For example, as the US has raised interest rates, there will be policy responses by Asian central banks and different market reactions from the investors. “The key to that is to monitor the interest rate risk sentiment, as well as the capital market flows,” he added.
In terms of assessing Asian bonds against other asset classes, such as global equity and global fixed income, Ng pointed to the traditionally low-to-negative correlation that Asian currency bond markets have had with developed bond markets and other asset classes.
“This is mainly due to Asian economies developing in a different fashion from more mature markets,” he explained.
“Over the medium-to-long term, we expect that the low-to-negative correlation of Asian bonds will continue to provide strong diversification benefits to global investors in their asset allocation decision making,” said Ng.
Invest in Asian local currency bonds with the ABF Pan Asia Bond Index Fund. Watch the video or visit www.abf-paif.com to learn more.
¹Source: Markit iBoxx ABF Pan-Asia Index and State Street Global Advisors, index data from January 2001 to November 2017. Past performance is not a guarantee of future results. Index returns reflect capital gains and losses, income, and the reinvestment of dividends.
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