Yesterday the European Central Bank provided a further nudge when it released further details of the fabled QE program which is set to start next week and run until September 2016.
While the greater political instability and volatility in Asia excluding Japan has always tempered enthusiasm for investment in the region, recent developments could tip a large portion of investors who have traditionally steered clear of Asian debt into thinking again.
According to ING Investment Management Asian debt is set to outperform developed market bonds in 2015 due to a combination of healthy corporate credit dynamics, supportive global liquidity, stable economic and political environments and investors’ demand for yield.
“Although the anticipated rise in US interest rates may present a challenge for Asian bonds, the Federal Reserve is still only likely to remove its zero-rate monetary policy gradually,” said Joep Huntjens, head of Asian debt at ING. “Furthermore, the impact of this will be outweighed by the spread cushion offered by Asian credit/high yield and the additional yield offered by the region’s local currency bonds.”
ING IM forecasts that Asian credit, including USD-denominated, high yield and local currency bonds, will deliver a total return as possibly high as 8.6% in 2015, although the base case is between 2% and 4%. Asian high yield could be as high as 11.4%, with the base case between 5.3% and 7.3%.
There have already been signs during the early part of 2015 that Asian companies have been upping their targeting of the opportunity created by the rock bottom yields offered by Western bonds with issuance at significantly higher levels than in early 2014. This should mean there is sufficient supply to serve any uptick in demand.
Then there is a Narendra Modi-inspired India going from strength to strength, with significant potential for attractive bond issuances as companies finance their growth and new infrastructure projects are rolled out. Interest rates are high relative to the West at 7.5% and although they are beginning to be trimmed back, they are not dropping significantly any time soon given that Modi has committed to keeping inflation around 4%.
While Indian equities have been grabbing headlines, it could be that the bond market is where there is more untapped potential.
The degree to which investors will realise the opportunity in Indian and other Asian debt, and then be willing to act on it is yet to be fully clear, however money moves around the world’s capital market in big chunks when a tipping point is reached and something becomes a widely accepted school of thought.