Seeking out attractive bond markets around Asia

Bonds from countries like China, Thailand, Indonesia, India, and Sri Lanka offer a good mix of options to investors seeking to develop diversified fixed income portfolios

Viewpoint
Jason Pang
Jason Pang

The Easter and summer holidays are around the corner so it may be time to plan for an investment that you can make in yourself, i.e. travel. Traveling can be a fruitful experience as you can learn about new cultures while enjoying the sights and sounds. Similarly, investing in a well-chosen and diversified fixed income portfolio may also prove fruitful so let’s embark on an investment journey across Asia to uncover the hidden gems in Asian bonds.

First stop: China

Chinese onshore bonds have been a well-traveled but profitable road for some investors producing a positive return of 1.7% in US dollar terms last year. The onshore market is also gaining ground this year, delivering 3.4%, as of March 27, due to a more accommodative Chinese monetary policy stance and positive sentiment from the ongoing trade talks with the US.

With China likely to maintain a dovish bias, onshore and offshore bonds have the potential to continue to perform well with the limited correlation to other bond markets as well as their pending inclusion into an influential global bond index. Alongside a potential trade deal, perhaps the renminbi may also spur a rally. 

The US Federal Reserve’s (the Fed) more dovish stance is a notable opportunity for Asian bonds. The Fed’s shift has opened up additional investment options in the rest of Asia, which is a vibrant region with dynamic opportunities that are perhaps little known to investors.

According to a World Economic Forum report, China is expected to account for a third of global economic growth in 2019 while the rest of Asia, surprisingly, is expected to take a 30% share - all the more reason for investors to consider the other parts of Asia.

Next stop: Thailand, Indonesia, India

Asia beyond China offers a good mix of investment options for bond investors. We see opportunities emerging from Thailand in terms of lower-yielding bonds as well as Indonesia and India (high-yield bonds). And we believe the current investment environment favors high-yield bonds, supported by the following themes:

·       The Fed’s pivot has offered relief to the region’s central banks. On a stand-alone basis, most Asian economies experienced benign inflation and constrained growth last year due to higher US interest rates and persistent global trade tensions. The pressure last year was most profound for countries with current account deficits, but arguably, that is now receding with the Fed’s dovish stance, which leads us to the discussion on value. 

·        As a total return investor in local currency bonds, higher yields tend to increase the buffer for capital loss in currency and interest rate volatility. Simply comparing 2018 with 2019, an emerging theme from a fixed income perspective which deserves attention is quality versus value. Last year was all about quality. For example, low-yielding Singapore dollar and Thai baht bonds proved to be highly resilient assets in the sell-offs. With the value creation witnessed in 2018 and the Fed’s pivot, current account deficit countries will benefit from some alleviation of external pressures and policy easing to support the local economies. In particular, we find Indonesian, the Philippines and Indian local bonds attractive given that yields are in the range of 5% to over 7.5% in such markets, with potential of currency appreciation if there is broad US dollar weakness.

 Final stop: a road less traveled, Sri Lanka

Tea, pristine beaches and azure waters generally come to mind at the mention of Sri Lanka. Though setting aside the positive perceptions, the country’s fundamentals are not the strongest within the region, and 2018 proved to be too volatile. The country is not a destination that most investors would consider based on a first impression. 

However, if an investor is already considering investments into dual-deficit countries such as India, Indonesia and the Philippines, then arguably, Sri Lanka would be a country which can benefit from the similar macro-dynamics of the Fed pivot.

Investing into frontier countries comes with significant risks, but arguably, also with better compensation in the form of higher return potential. The country’s local bonds offer over 10% nominal yields, decent real yields and multilateral support. This suggests that while Sri Lankan bonds are unlikely to be a centerpiece in investor portfolios, a measured approach towards this market may offer asymmetric payoffs, if fiscal reforms and tourism development efforts are successful.  

Already, the International Monetary Fund program has led to improvements in tax and fuel price reforms and thus, improvement in foreign investor sentiment. A key focus for the Sri Lankan economy will likely be infrastructure development, including tourism-related projects and logistics, for much-needed expansion of the country’s road, air and sea connectivity.

In addition to international visitors, the nation’s savvy millennials are also the emerging future for the country’s tourism industry, alongside their increasing demand for consumption, experience and culture. Beyond offering a South Asian culture and experience, Sri Lanka is also geographically in a sweet spot, bridging the travel destination gap between Europe and Asia.

Indeed, while this is a road less traveled by investors, we do note Sri Lanka has been named the number one country in the world to visit in 2019 by Lonely Planet. Tourism numbers have quintupled over the past decade to 2.3 million in 2018.

With persisting market volatility, perhaps it is now timely for investors to consider off-the-beaten track destinations. 

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Date

12 Apr 2019

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