Asian bonds in a sweet spot

Manulife Investment Management, for one, says Asian fixed income will continue to perform well this year on the back of a supportive global backdrop and continued policy support

ASIA should continue to draw foreign inflows into its fixed-income market amid the low interest rate environment through 2021.

Fund managers say this expectation is based on the fact that the region offers relatively higher yields and strong “carry” opportunities in comparison to other parts of the world. In addition, they note, the region has a relatively more resilient and robust economy.

Manulife Investment Management, for one, says Asian fixed income will continue to perform well this year on the back of a supportive global backdrop and continued policy support.

With better fundamentals than its peers, the asset management explains, the asset class is poised to be in a better shape for potential upside, anchored to Asia’s resilient credit profile and burgeoning multi-year sustainable investing opportunities in Asia.

“The more favourable macro landscape in 2021 should be constructive for Asian fixed income. We are positive on the broader Asian fixed-income landscape, given its resilient credit fundamentals, continued accommodative monetary and fiscal policy, and downward pressure on the US dollar, ” Manulife Asian fixed-income team (ex-Japan), led by chief investment officer Endre Pedersen and deputy chief investment officer Murray Collis, says in its 2021 outlook report.

Manulife points out attention is now drawn to Asian bonds which not only offer positive yields but also higher quality investment opportunities, as negative yields in developed market bonds have made it more challenging for bond and income-focused investors, particularly in a lower for longer interest rate environment.

Hence, Asian bonds is an attractive asset class in 2021.

“Asian bonds are in a sweet spot compared to developed market bonds. For instance, we think Chinese bonds will continue to attract foreign inflows in 2021 from its index inclusion and yields of Indonesian and South Korean 10-year sovereign bonds are trading well above US treasury, ” Collis says in a statement.

“On the credit side, US dollar Asian corporate bonds are rated investment grade on average, and with the yield premium and lower drawdown relative to US credit markets that we have witnessed in 2020, we believe Asian bonds is an attractive proposition for investors globally, ” he adds.

Sustainable opportunities

Manulife also sees emerging opportunities in Asian sustainable bonds.

“We are also seeing compelling sustainable opportunities in the Asian bonds landscape, as climate change, demographics and governance become top-of-mind themes among investors, ” Collis says.

“In addition, evidence suggests that sustainable investing can achieve the same, if not better, returns versus traditional bonds, ” he notes.

As such, he argues, Asian fixed income portfolios should not only consider environmental, social, and governance (ESG) risks but also actively take advantage of ESG opportunities.

In terms of specific ESG opportunities in Asia, investors should look for companies that will benefit from environmental or social trends such as providing clean technology that will help to mitigate climate change or demographic shifts, Manulife says.

Besides environmental and social factors, investors should emphasise the importance of governance factors.

From a governance perspective, the firm explains, investors should focus on companies with more independent and diverse boards while rejecting those with a history of mismanagement or opaque business models.

Recovery underway

Meanwhile, Nikko Asset Management expects Asian credit spreads to tighten gradually over the coming months.

“High-frequency indicators suggest a recovery is underway in most Asian economies, lending support to overall corporate credit fundamentals. Credit supportive fiscal and monetary policies are also expected to remain in place in most developed and emerging-economy (EM) countries, even if incremental easing measures are likely to moderate hereafter, ” the investment management firm says in its 2021 outlook report.

It points out that the progress on vaccine development and better treatment for Covid-19 cases further reinforce the positive backdrop.

“The technical backdrop is also favourable with inflows to EM hard currency bond funds expected to remain robust. That said, valuation is no longer cheap given the sharp rally in credit spreads over recent months, and we expect more regular episodes of market pullback going forward, ” Nikko argues.

According to the asset manager, amid the vaccine and policy-driven reflationary expectations in the developed market economies, long-end US treasury yields may rise and steepen the curve in 2021.

“This may offset the positive impact from credit spread tightening and result in low-single digit positive returns for Asian investment-grade (IG) credits in 2021, with carry being a more prominent driver, ” it says.

“We expect Asian high yield (HY) to generate a higher total return. There is more room for spread compression within Asian HY, which will also be less affected by rising long-end US treasury yields given its shorter duration, ” it adds.

Hence, Nikko explains it prefers Asian HY credits over Asian IG at the start of 2021.

“Within HY, we prefer short-dated Chinese property bonds over industrial sectors across China, India and Indonesia. Within Asian IG, we also prefer compression, favouring BBB-rated credits over those that are A-rated and above, ” it shares.

In general, Nikko favours countries with high carry such as Indonesia, where flows have begun to return. It prefers to be patient on Indian bonds at this point, waiting for inflationary pressures to moderate.

Similarly, DBS Bank appears to favour Asia HY, expecting the region’s credit to continue to stand out with its decent fundamentals and inexpensive valuations.

“Asia HY is trading at much wider yields compared to the rest of the credit markets, given that Asia has most effectively handled the virus crisis and is continuing to make progress on re-opening, and ratings agencies having projected much lower default rates in Asia versus US and European HY, ” the Singapore bank argues.

“While idiosyncratic risks remain with pockets of highly leveraged issuers in Asia, we believe that there is little basis for the broad cheapening of the entire sector to remain for a protracted period, ” it adds.

All things considered, DBS Bank maintains its stance that both Asia and European HY would be key beneficiaries of search-for-yield motives. The BBB/BB segment remains the segment of choice, with a preference for the five to seven years maturity tenor.

With foreign inflows, Asian currencies are also expected to appreciate against the US dollar.

Within the region, Nikko expects the Chinese yuan, South Korean won and Singapore dollar — being relatively more trade-sensitive — to outperform, while lingering political risk will be key headwinds for the Malaysian ringgit and Thai baht, which may cause these currencies to lag their peers.

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