The global bond market has seen high levels of volatility in the last few months, but the experts at Amundi Asset Management see upside to the situation and recommend coping strategies for investors.

ON THE Malaysian context, Amundi Malaysia Sdn Bhd chief investment officer for fixed income Ahmad Najib Nazlan says the theme moving forward is interest rates are going to be biased down south.

“For Malaysia, the situation is a bit benign. Our recent gross domestic product (GDP) numbers at 5.6% is a tick above the average, as the consensus was 5.5%. This is largely due to pre-GST spending,” he explains.

“As for the rest of the year, we don’t think there is any pressure to increase interest rates.  Because of inflation, credit creation is not there. If you look at bank balances or accounts on the asset side, loan generation isn’t there. Home ownership is decreasing and the private consumption we were hoping would spur economic growth is not there.”

Ahmad Najib expects GDP growth for the rest of the year to be around 4.6%. He thinks Malaysia will see a looser monetary policy, in line with where Asia is at.

He says he sees a lot of liquidity sloshing around in the local market due to the Ministry of Finance’s request for government-linked companies (GLCs) and statutory bodies to put a temporary hold on purchasing foreign assets. The announcement was made in January in response to falling commodity prices and was intended to contain capital outflows. 

“A lot of the real money funds are prohibited from being invested offshore, [the government] would rather have the outflow of funds contained within the country. The problem with that is you now have too much liquidity sloshing around and too few securities to be invested in,” Ahmad Najib explains.

“So, with this you have two challenges — first, the liquidity is trying to find avenues for investments and second, the valuations of local securities are a bit too rich.”

Another concern is a weak corporate bond issuance pipeline, he says. The first quarter of the year saw only RM9.7 billion worth of issuances, compared with RM19.4 billion in the previous corresponding quarter. 

“Furthermore, a lot of them are government-related issuances, so that does not count. The corporate accounts are not issuing or tapping the bond markets,” he adds.

“But that being said, as we are biased towards a more or less stable or accommodative monetary policy, we have heard that some corporates are beginning to rethink their positioning to tap the pipeline. So, things might improve in the second or third quarter.”

Investors should revise their strategies

In this environment, Bender’s advice for ringgit-based Malaysian investors is to adopt a core and satellite investing portfolio. This strategy employs a core portfolio of ringgit-based assets, with the satellite investments — which come out of the investor’s excess funds — added on. 

“As a Malaysian investor, my core has to be asset/liability management (a strategy that coordinates the management of assets and liabilities for adequate returns). And I am going to do it through ringgit-based investments,” he says.

“In my satellite, I am looking for the robustness of an all-weather solution as part of my portfolio and I want to play very specific themes, like India, China, Australia, Canada the eurozone. These economies are going through the commodities supercycle.”

As for satellite investments, Bender recommends using flexible, opportunistic, agile global bonds or multi-assets as diversification. “Over and beyond that, do you see opportunities in bond markets such as India or China to accentuate certain bets on a regional basis? There are opportunities, just not in the places where people expect to find them.”

While investors can no longer afford to employ the buy-and-hold strategy, Bender says there are still opportunities to generate more alpha, albeit in different places and via other instruments and approaches. 

“We can find them in the rate, credit and FX space. There are some markets you might prefer as a bond investor, such as India, China, Malaysia, Australia or Canada. I want to have an extra focus on FX — an integral part of global bonds — because there is a lot of volatility there. 

“If you can take advantage of this 50% to 70% movement in the yen, Australian dollar, Canadian dollar, pound or euro, and as an investor if you can pick up 5% to 15% of that movement, that will contribute to the alpha you need to generate to compensate for the lack of carry [in the bond market] you are talking about.”

Ahmad Najib admits this isn’t a conventional way of gaining investment profits, but says investors cannot stay disillusioned that the fixed income space in terms of the local currency will revert to the yields we saw in early 2000, when AA-rated ringgit bonds were yielding close to 6%.

“That is not going to happen anytime soon. We need to have a paradigm shift that this current situation is going to be with us for some time,” he adds. 

Apart from accepting the change in market conditions, investors have to get used to the swings in bond yields and cannot afford to get nervous about volatility. “If you can’t absorb any losses, you are in the wrong product, and even more so in these trending conditions. Go to money markets or short-term low-volatility stuff, such as buy and hold bond funds, low volatility absolute return funds or defensive multi-asset funds, instead. But bring down your target return expectations,” advises Bender. 

“We are trying to trade in a condition where bonds and credit are quite expensive, and you are seeing this massive global rebalancing through the FX markets. Who would have imagined the yen going from ¥75 to ¥125 [against the US dollar] in a couple of years, and the Australian dollar go down 30% in a year? These are huge swings in asset prices.”

As the world is fundamentally changing, Bender says investors have to reassess their parameters in terms of pain tolerance, objectives, investment horizons and liquidity requirements.

“Have a clear goal of what your investment horizon and objectives are, remain as diversified as possible, and look at investment solutions that are tried, tested and have a track record. That is the only thing you can do.”

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 22 - 28, 2015.

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