The majority of Asian government bonds are now investment grade, with Indonesia being the latest to receive an upgrade from credit rating agencies, Fu said during a media briefing last week.
During the first half, local currency sovereign bonds in emerging markets, which are mainly Asian government bonds, returned the highest among fixed income asset classes, according to a report from JP Morgan Asset Management.
Source: JP Morgan Asset Management
Fu also prefers Asian sovereign bonds over Asian corporate bonds.
“We do have corporate investments, but we want to avoid significant idiosyncratic risks in corporates, so we assess them vigorously,” he said, adding that Asian sovereign bonds offer a higher risk-adjusted return.
Fu added that Asian sovereign bonds are supported by positive macroeconomic indicators. For example, the market has seen stable growth, driven mainly by Indonesia, India and the Philippines. He also believes that Asian currencies are increasingly driven by fundamentals such as positive current accounts and the overall balance of payments.
Fu said that since 2013, emerging market local currency debt funds saw huge outflows from retail investors.
On the flipside, Asian institutional investors have started to increase their investments in local currencies. Net inflows from institutional investors increased to $26bn in June from around $13bn in June last year, according to Fu’s presentation.
The demand from institutional investors is mainly driven by regulatory changes in banking, insurance and pension funds, as regulators increasingly want to minimise equity and foreign exchange risk.
“So this creates a bias rather than a natural demand for fixed income within the institutional space, but that has helped support Asian local currency and we think this is important because institutions are often ahead of retail investors,” he said.
In addition, institutional investors are long-term investors and look at fundamentals, in contrast to retail investors who look for the flavour of the month, Fu added.
The performance of the Legg Mason Western Asset Asian Opportunities Fund versus the Asia fixed income sectors in Hong Kong and in Singapore over three years, according to FE data.
The fund invests around 60% of its assets in Asian sovereign bonds and is managed by Lian Chia Liang, the firm’s head of emerging markets debt, Desmond Soon, head of investment management for Asia ex-Japan and Lim Swee-Ching.