Indonesian bonds in Manulife AM’s sights

Asset Class in Focus

The firm also likes onshore China bonds, despite the potential for an escalation of the trade war with the US.

Jimond Wong, Manulife Asset Management

A number of markets in Asia, such as Indonesia, India, Malaysia, the Philippines and South Korea, have increased interest rates last year, which creates opportunities in the regional fixed income market, according to Jimond Wong, managing director and senior portfolio manager for Asia fixed income.

“This is actually positive in the Asia bond space because now you are enjoying a much higher interest rate in local currency bonds and I don’t expect a lot of drag from interest rate hikes from these markets. It is a very good carry story for investors and a good place for those who want some steady income,” he said at a recent media briefing.

But within the Asian market, Wong singled out Indonesia, which was one of the most negatively affected markets in the region during the first half of last year as the US dollar strengthened.

Among equity markets, Indonesia also became one of the worst performing in 2018.

However, Wong noted that the country’s central bank quickly responded by raising interest rates to stabilise its currency and bonds from external volatility.

“Indonesia’s economy is very robust, and with a higher interest rate and a now steady foreign exchange, investors can see capital gain upside in local currency bonds in Indonesia given the sharp corrections in 2018,” Wong said.

Indonesia accounts for 11.2% – the third largest country allocation – of Manulife AM’s Asia Absolute Return Fund, which Wong co-manages, according to the fund factsheet. The fund is available only to professional investors in Singapore and Hong Kong.

Indonesia is also the preferred emerging market in Asia within the fixed income space for Morgan Stanley Investment Management, according to Michael Kushma, chief investment officer for global fixed income, citing high average yield relative to other emerging markets.

Indonesia sovereign bonds have a yield range of 5%-8%, with a duration of approximately six years, Kushma said in a recent FSA interview. Corporates are close to 8% with a duration just under five years, he added.

“We currently see value in both Indonesia’s sovereign domestic bond yields and external bond spreads. Our fair value spread models imply a fair value yield for Indonesia local is 7.6% and fair value spread for Indonesia external at 215bp,” Kushma said.

China bonds

Wong is also positive on onshore China bonds after the announced inclusion of the asset class on the Bloomberg Barclays Index, which is expected in April.

“We think that in 2019, more investors will be investing into China bonds. We expect that in the first year, there will be roughly around $80bn of inflows toward China bonds,” he said.

China bonds account for the largest allocation (44.4%) of the firm’s absolute return fund, according to the fund factsheet. It does not give a breakdown of how much are in onshore or offshore securities, however.

Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management, explained that the Bloomberg Barclays Global Aggregate Index will initially allocate a 6% weighting to onshore Chinese bonds. However, only policy bank bonds and government bonds will be included.

“Other corporate bonds will not be included in the index at the moment because Western credit rating agencies are not allowed to publicly publish their ratings of onshore securities,” he said during a recent media briefing.

“But as soon as that is allowed to happen, that 6% weighting is expected to increase to 12%,” he said, adding that he expects that China onshore bonds will eventually account for 20%-25% of the global aggregate index in the next five years.

Briscoe also highlighted the higher yields in Chinese bonds relative to other markets.

Source: UBS Asset Management

“When you’re building your global multi-sector funds or asset allocation funds, the number one thing that you are looking for is positive real yields in bonds. And Chinese bonds offer you one of the highest real yields compared to developed market bonds because the inflation rate in China is relatively low and is sticky at around 2%,” Briscoe said.

However, Manulife’s Wong is watching the renminbi with caution and holds concerns about the potential for a trade war escalation, which would impact on the currency and investor sentiment.

“When foreign investors come into the renminbi bond space, they cannot hedge cash aggressively as in many other markets, so I think renminbi depreciation or appreciation will be one of the key considerations in the next two years.”

Nonetheless, foreign investors have continued to add Chinese bonds to their portfolios despite the renminbi currency swings last year, according to UBS’s Briscoe.

Source: UBS Asset Management

Manulife AM’s Asian Bond Absolute Return Fund versus its benchmark index and sector in Singapore

Source: FE Analytics. Note: All fund, benchmark and sector NAVs have been converted to US dollars

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