The March 2018 results of the Fund Selector Asia Asset Class Research shows fund selectors and asset allocators surveyed by FSA have significantly increased interest in emerging market bond funds, compared to the data from December 2017. The shift is visible both in corporate and government bonds.
Fund Selector Asia Asset Class Research is a forward-looking quarterly survey of long-term (12 months) sentiment of fund selectors and asset allocators in Asia’s four financial centres toward 26 asset classes and fund product categories, such as index trackers or total-return funds. The respondents represent private banking and wealth management divisions of domestic and global institutions operating in the region.
The question FSA posed was: “In the next 12 months, will you increase your asset allocation to emerging market corporate bonds, decrease it, maintain it at the current level, or you don’t invest in it?” An identical question was asked about emerging market government bonds.
Data: FSA, March 2018. FSA measures the net sentiment in an asset class or a product category by subtracting the percentage of respondents who say that in the next 12 months they plan to reduce their allocation to the asset class from those who plan to increase it.
While the net sentiment in emerging market corporate bonds in March was higher than in government bonds, the change between December and March is more dramatic for government bonds.
The net sentiment for emerging market corporate bonds grew to 34% in March from 13% in December, a shift of 21%, while that for government bonds grew to 21% from negative 6%, a 27% swing.
Data: FSA, March 2018. FSA measures the net sentiment in an asset class or a product category by subtracting the percentage of respondents who say that in the next 12 months they plan to reduce their allocation to the asset class from those who plan to increase it.
This shift in sentiment corresponds to a similar shift of sentiment towards emerging market equities.
Kevin Liem, CIO of CBH Asia, attributes it to the strong performance of emerging markets in 2017, but also to investors’ concern about the market impact of rising US interest rates and the trade tensions between China and the US.
“Emerging markets investments serve as a diversifier for both of these worries,” he told FSA.
There are several factors underpinning this stance. “The US dollar depreciated against most emerging market and Asian currencies in 2017,” Liem said.
“Valuations in emerging market securities (equities and bonds) are more attractive compared to the developed markets. Emerging market central banks are still relatively dovish compared to the developed markets, especially the US Fed. Many emerging market economies are at an earlier stage in the economic cycle compared to the developed markets, especially the US.”
While a trade war would have highly negative consequences for the global economy as a whole, not all markets will be impacted equally and there even may be some winners.
“If a trade war does happen, emerging markets can potentially benefit from this scenario,” Liem said. “For example, China will buy more soy beans from Brazil, if they buy less from the US.”
