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Asian fixed income is not what it used to be

Added 12th March 2015

The typically-held investor concerns about Asian fixed income diversification, liquidity and credit quality are diminishing, according to Jamie Grant, head of Asia fixed income at First State Investments.

Asian fixed income is not what it used to be
Grant told Fund Selector Asia that since 2008, issuance in Asia has quadrupled, creating a more diversified offering of sectors and increasing liquidity. The spike in issuance is due to corporates realising they need alternative sources of funding.
"With more participants in the market, more global asset managers with a credible Asian fixed income business, liquidity increases. It's not as good as liquidity in the US, but better than it was and projections are that the number of future issues should continue to improve."
Credit quality has been a key concern of investors looking at Asian fixed income, but Grant said the siutation has improved considerably.
"Now [Asian credit quality] is sitting in line with the most commonly used US credit index, the Barclays Capital US Aggregate Bond Index.
"With projected growth for Asian economies in the next five years, it's not unreasonable to suggest credit quality will continue to improve." 
Transparency of the issuer is still a risk in the region, Grant said. But as more issuance occurs, market transparency will improve. "Investors are guiding [issuers], saying what information is needed at a minimum."

Currency maneuvers

"The development of the Asian fixed income market is starting to become credible, given the size and investor demand," he said, adding that Asian dollar credit "is starting look like a safehaven". 
Currency concerns, however, are more than US dollar strength and euro and yen weakness and how central banks in the region react to that, Grant said.  Local currencies could be at risk.
"Everyone seems to be seeking to devalue their currency to be more competitive and that's a political risk. 
"Central banks in the region have the ability to cut rates because they are somewhat high relative to the developed world. There could be a race to the bottom [as countries make competitive devaluations of their currencies]."

Investment grade vs high yield

Grant said investors may believe they are getting Asia exposure through emerging markets, but that may not be the case. Asia yields less than Latin America or Eastern Europe because risks are lower. Therefore, EM managers tend to underweight Asia, preferring to get the higher yield in the other riskier geographies.
In the next 12 months, on a risk/return basis, investment grade dollar credit looks like the best opportunity, Grant said. 
By geography, his team is overweight China in dollar credit, overweight Hong Kong and has smaller overweights in Malaysia and Indonesia. 
Grant added that compared to investment grade, the Asian high yield market is behind in development.
"High yield dollar credit has had its concerns, dominated by the property market in China. The size and depth are not quite there yet and there are liquidity constraints. In 3-4 years we'll see the development of a credible Asian high yield market, but now the headwinds in China property will weigh heavy on the sector."
He's underweight in Korea and the Philippines based on high valuations, and neutral on India, which he said has positive headwinds and extremely positive investor sentiment.
"We got India wrong," he admitted. "It looked expensive some time ago, yet continued to rally and valuations will always win out in the end in determining over- or underweight." 

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