Fixed income: Asian bonds poised to stand out

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 4, 2019 - March 10, 2019.
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Asian bonds are looking attractive because of their high quality ratings, attractive yields and low default rates. Those in China and Indonesia are especially so, says Jason Pang, fixed income associate client portfolio manager at Manulife Asset Management in Hong Kong.

According to him, a standout feature of Asian bonds is their high credit ratings as many countries in the region have upgraded their sovereign ratings over the past decade. “Of the 11 Asian markets, 10 are investment-grade. And in the last 10 years, four of them have seen a credit rating upgrade. This means Asian bonds are of very high quality and have improving momentum, which is another reason why we think Asian bonds will stand out this year,” says Pang.

Asian bonds have higher yields than those in other markets, particularly in the sovereign category. Indonesia’s 10-year government bonds have the highest yield at 8.03%, followed by India (7.37%), the Philippines (7.06%), Vietnam (5.10%), Malaysia (4.07%) and onshore China (3.31%). These compare with the 10-year US government bond yield of 2.68%.

“If the US Federal Reserve pauses [its interest rate hikes], investors will look back at the yield differential. These are some of the markets that we think will stand out,” says Pang.

In addition, the default rate of Asian high-yield bonds is expected to be lower than those in other regions. It is forecast at 2.5%, similar to last year.

Asian bonds are seeing lower volatility and offering more stable performance than those in other markets, says Pang. “Given all these features, it is not surprising that Asian bonds are exhibiting lower volatility than the other asset classes. Where you want to be is at a point of relatively low risk but giving a high return.”

Asian bonds are poised to benefit from the region’s strong economic growth, with real GDP forecast to grow at 5.7% this year. By comparison, the US and European economies are expected to see growth of 2.6% and 1.7% respectively. Global growth is forecast at 3.5% this year.

Asian bonds are currently in a “sweet spot” because they are anticipated to be beneficiaries of fund flows as investors look beyond the US for opportunities amid a potential pause in the Fed’s interest rate cycle.

“The US central bank will very likely pause its interest rate hikes. Given this backdrop, investors will look at fundamentals such as growth and yield differentials before investing, which makes Asian bonds a standout asset class,” says Pang.

“Our team is expecting maybe one more rate hike before the pause. This means there will be a very stable interest rate environment.”

Two markets in which Manulife sees opportunities are China and Indonesia. The inclusion of China bonds into the Bloomberg Barclays Global Aggregate Bond Index next month bodes well for investors, says Pang. China is currently the third largest bond market in the world, behind the US and Japan.

“This means a lot of investors, especially bond investors and pension funds, will follow this index very closely. The index will allocate 5% of its weightage to onshore China bonds, which is currently at 0%. We are expecting some investors to follow suit and allocate this amount to Chinese government bonds,” says Pang.

“Other index providers may also follow suit. Because of that, we believe that passive and fixed-income investors as well as pension funds will allocate [investments to these bonds]. This could potentially attract US$600 billion worth of inflows into this asset class.”

Manulife also favours US dollar-denominated Indonesian corporate bonds, he says. Three factors make them stand out. First, Indonesia is currently rated investment-grade and this is important as a lot of bond investors have mandates or guidelines that require them to invest in investment-grade paper.

Second, some Indonesian state-owned enterprises may benefit from the investment credit rating of the government. And third, Indonesian corporate bonds currently have attractive yields.

“The yield for pure corporate bonds that do not have government support is quite attractive. Some of them have yields of 9% or 10%,” says Pang.


Bond fund

The fund house has launched the Manulife Asia Total Return Bond Fund to take advantage of these opportunities. The fund aims to provide total returns from a combination of income and capital appreciation by investing in a collective investment scheme with a focus on fixed-income securities. It will invest at least 95% of its net asset value in the Manulife Global Fund — Asia Total Return, which has been domiciled in Luxembourg and managed by Manulife Asset Management in Hong Kong since 2011.

In terms of strategy, the target fund invests in a quality and diversified portfolio. Its average credit quality will be maintained with investment-grade bonds with tenures of one to six years. It invests a maximum 25% of its portfolio in high-yield corporate bonds. The fund’s cumulative performance over one, three and five years stands at -1.54%, 11.26% and 13.29% respectively.

Manulife Asset Management Services Bhd head of retail wealth distribution Ng Chze How says the fund is able to invest in Asian high-yield investment-grade bonds, high-yield bonds and currencies to generate meaningful returns for Malaysian investors.

The Manulife Asia Total Return Bond Fund is suitable for investors who seek a combination of income and capital appreciation, have a medium to long-term investment horizon and seek investment exposure in Asia. The fund is available in three asset classes — US dollar, ringgit and renminbi. The minimum initial investment amount is US$1,000, RM1,000 or RMB1,000.

Manulife Asset Management Services Bhd CEO Jason Chong says while the fund is open to everyone, it also serves as a good long-term investment vehicle for millennials as the younger generation has not been saving enough. “The government has been emphasising the need for them to start saving early because it is one of the problems faced by the younger generation.

“This is a good product as our running yield is 5%. On top of that, there is room for capital appreciation. So, this is a good long-term investment.”