Adeline Ng, head of Asia fixed income at BNP Paribas Investment Partners, sees positive fundamentals in the region’s bond markets.
Why should European investors consider Asia Fixed Income for their portfolio allocation?
The low interest rate environment is impacting the attractiveness of European fixed income instruments. This environment has prevailed since the Global Financial Crisis (GFC). The current backdrop has the European Central Bank (ECB) committed to Quantitative Easing (QE) measures and various countries are cutting interest rates, so easy monetary conditions and low yields look likely to continue. The quest for yield has meant that European investors have had to explore outside the European fixed income universe. In the past, they would have done so in emerging markets but for two or three years, news flows have been negative. If an investor goes by fundamentals, they find that Asia ex-Japan’s growth is around the 6% level and Asia has been a beneficiary of the decline in oil prices, policies flexibility and stronger growth.
How about credit quality and default rate?
In the past 18 months, Asia enjoyed a stable to positive rating outcome, compared to developed economies and other emerging economies that were subject to downgrades. Currently, in the Asia universe, almost 80% of issuers have investment grade status. According to Fitch’s study on corporates from 1990 to 2014, Asia is the only regional block that had a zero default rate in its investment grade universe. In the high-yield space, we will close the year a touch below 3%. Historically Asia has a lower default rate in high-yield than other emerging markets: in 2003-05, 2007 and 2011, it was zero.
Given broad emerging market volatility, what differentiates Asia from its peers?
Its better growth rate, despite the global growth moderation. Also, its growth contribution is around 50% of global emerging market GDP. The defining line is in policy flexibility. This year, you’ve had rate cuts in Thailand, China, Korea, India and Taiwan, but real interest rates is still around the 5% level, adjusting for inflationary pressure, which means you still have room to cut.
Fiscal policy is also important: government debt and fiscal deficits are lower compared to both developed and broad emerging markets. This gives governments room to spend. There has been some spending in China and South Korea but by and large, you don’t have significant government spending across Asia.
Are you worried about the slowdown in China?
China’s slowdown was well guided in advance. The government had already hinted the new normal was 7%. The IMF’s forecast was for 6.5% -7%. The People’s Bank of China has been proactive in using various means of boosting liquidity via cutting lending benchmark rates, reserve requirement ratio and standing lending facility to cushion the growth moderation. China is also adopting a ‘pro-active’ stance in its fiscal policy: given its low government debt and high FX reserves, it has significant room on spending. Volatility in equities and currency may dampen sentiment but does not remove this flexibility.
What is the outlook for Asia credit bond markets?
Asia has positive fundamentals. Asian bonds give you 60-80 bps above their US and European investment grade counterparts, which are trading below their long-term average; Asian bond valuation are slightly higher than their long-term average. On the valuation angle, Asian bonds look reasonable. In terms of risk factors, oil spikes are unlikely to derail the situation. We also monitor currency, but finance ministers at the Asia-Pacific Economic Co-operation meeting re-affirmed their commitment to refrain from competitive devaluation and resist protectionism.