Why Asian bonds?
Region
From a historical perspective, it is not that long ago that Mexico, Argentina, Russia and all of Asia were in crisis. In fact, it was
1997 when Asia was suddenly hit by a currency crisis of unimaginable severity after a long period of expansive growth.
Dr. Eugen Löffler
Chief Investment Officer Fixed Income Asia
Pacific at Allianz Global
Investors Asia Pacific
It originated in Thailand and spread to neighbouring
Indonesia, Malaysia, the Philippines, Singapore and
South Korea. In the meantime, these countries have
not just recovered; they are going from strength to
strength after implementing far-reaching structural
reforms. International equity investors have always
kept an eye on Asia, but nowadays it is the Asian bond
markets that are also increasingly attracting investor
interest. What are the characteristics of the Asian bond
market and what are its prospects for future development?
Scheurer: Dr. Löffler, Asia seems to be evolving
into the new “centre of gravity in the 21st century”.
Do you agree with this opinion?
Dr. Löffler: I do! Emerging markets already account
for nearly 50 % of global gross domestic product (GDP,
purchasing power parity). As far as Asian EMs are concerned, their share is about 30 % and will in all probability continue to grow strongly over the coming years.
Even if economic growth in China should slow down
to about 6 % over the medium term for structural reasons, as a natural consequence of the ongoing development process, China will still continue to account for
a large share of global economic growth purely by dint
Stefan Scheurer (Global Capital Markets &
Thematic Research) discussed this topic with
Dr. Eugen Löffler, Chief Investment Officer of Asia
Pacific Fixed Income at Allianz Global Investors.
of its size. Having said that, Asia does not consist only
of China: the region is home to a further two nations –
India and Indonesia – that have very high populations
and strong growth potential. Even the tiger states
from Asia’s first growth phase still have the potential
for above-average growth, given the competitive and
innovative strength of their economies, even if they
can, of course, no longer match the growth rates witnessed in China or India. Nevertheless, a growth rate of
3–4 % is still very high, especially when compared with
the medium term outlook for industrialised countries
such as the US or Japan, which are forecast to grow by
2.3 % or 1.7 % respectively in the long-term.
International equity investors have
always kept an eye on Asia, but nowadays it is the Asian bond markets that
are increasingly attracting investor
attention.
Understand. Act.
Focus: Why Asian bonds?
Growth is, however, not everything. Top-rated government bonds are becoming ever rarer among developed industrialised countries. Growing Asian countries
have been able to avoid this negative trend and have
actually even improved their debt situation overall.
China’s rating, for example, has been improving since
2002, and Hong Kong even managed to secure the
coveted triple-A in 2010. Which Singapore has held
since 1995, by the way.
The rating agencies’ main justification for the steady
upgrades over recent years has been the marked
improvement in the debt situation, alongside the
strong economic growth. Indonesia, for example, has
managed to reduce its national debt from more than
70 % of GDP before the Asian crisis to currently below
30 %. The Philippines are also making good progress in
consolidating their public finances.
By contrast, the International Monetary Fund expects
the average national debt of the G7 nations in 2012 to
reach as much as 125 %, with some individual countries well in excess of that mark. The debt forecast for
selected Asian countries1 for 2012 is about 32 % on
average.
And let’s not forget the forex reserves that the Asians
have been hoarding over recent years. Asia now holds
more than 60 % of the world’s currency reserves.
Scheurer: A consequence of the reasons you list is
that risk premiums for Asian bonds are currently historically low. How do you rate future development?
Dr. Löffler: I see two reasons why the spreads on
Asian bonds have narrowed. The fundamental risk
position of Asia has improved, both in absolute and
– even more so – in relative terms, given the severe
deterioration in the economic and fiscal situation in
industrialised countries since the global financial crisis.
The spreads have meanwhile dropped below their
long-term average of the last 10 years and are at a
historically low level. Nevertheless, we assume that the
spreads could narrow even further in future, given the
positive structural changes in the region and the relative attractiveness of Asian bonds.
China, India, Indonesia,
Malaysia, Pakistan,
Philippines, Singapore,
South Korea, Taiwan,
Thailand, Vietnam.
1
Scheurer: And strong demand for Asian bonds
means rising prices and declining returns. What sort
of yields can investors earn on Asian government
bonds at the moment?
Dr. Löffler: Asian government bonds generate a
return of 3.4 % per annum on average in local currency
terms. As such, they are more attractive than G7 government bonds with their average yield of 1.7 %. Indonesian or Philippine bonds are yielding around 5.3 %
and 4.3 %, while more than 8 % can be earned in India.
If you take a look at the current yields on government
bonds issued by the leading industrialised nations –
albeit disregarding the peripheral Eurozone – they
actually dropped well below 2 % temporarily, take
US or German government bonds for example, thus
reaching a new all-time low. The scenario offers international investors the opportunity to mitigate their
risk exposure to the growth and fiscal policy problems
facing the industrialised nations and, at the same time,
to raise their yield expectations. Investment focus
should not, however, centre solely on Asian government bonds.
Even corporate bonds in Asia are currently offering
better yields than their peers in industrialised countries, at about 4.2 %.
2
Focus: Why Asian bonds?
Scheurer: What else makes the Asian bond market
attractive for investors?
Dr. Löffler: The structural strength of the Asian
economies – in terms of their high growth rates,
strong ability to compete, trade and current account
surpluses – indicates that their currencies will demonstrate a structural upward trend, which investors can
take advantage of by investing in Asian local currency
bonds. Over the medium term I believe that the
exchange rate component could even play a more
important role in overall earnings than the current
interest rate spread. Forex markets are, of course, not
one-way streets and many Asian currencies are still
very dependent on short-term portfolio decisions by
international investors. As global risk aversion persists,
the Asian currencies will therefore probably continue
to show phases of weakness over the short term. This
could, however, be a good chance for investors with a
long-term horizon to start investing.
It may be a simple indicator, and perhaps a bit faddish,
but the Big Mac index clearly shows how structurally
undervalued the currencies of numerous Asian countries are.
• Recent years have shown that the emerging
markets, especially in Asia, have become fundamentally much more stable, although risks
(e. g. liquidity or political risks) still persist in light
of the increasingly global economic ties.
• In addition to higher economic growth and lower
debt levels compared with the developed world,
however, Asian EM bonds are also playing an ever
more important role for investors in the context
of their portfolios.
• Apart from which, as numerous investors
frantically search for investment opportunities
that promise good yields, demand for emerging
market bonds could well increase further in
future.
• What is more: The positive growth prospects for
the new “centre of gravity in the 21st century”
will put pressure on local currencies to appreciate, which could generate additional benefits for
investors.
*The Economist’s BigMac-Index is based on
the theory of purchasing
power parity: that, in the
long run, exchange rates
should adjust to equal
the price of a basket
of goods and services
in different countries.
The Economist’s basket
consists of one McDonald’s Big Mac, and they
have compared it with
the average price in
America, $4.33.
Past returns is not a
guarantee of future
results , Source: The
Economist; Allianz
Global Investors Capital
Markets & Thematic
Research
Thank you for sharing your thoughts with me.
Appreciation potential of Asian currencies
Big-Mac-Index* purchasing power comparison
Norway
Switzerland
Brazil
Australia
Eurozone
United States
Japan
Singapore
South Korea
Phillippines
Thailand
Indonesia
China
South Africa
Malysia
Russia
Hong Kong
–60 %
Imprint
Overvalued
Allianz Global Investors Europe GmbH
Mainzer Landstraße 11–13
60329 Frankfurt am Main
Global Capital Markets & Thematic Research
Hans-Jörg Naumer (hjn), Dennis Nacken (dn),
Stefan Scheurer (st)
Undervalued
–40 %
–20 %
0%
20 %
40 %
Big‐Mac‐Index* purchasing power comparison
60 %
80 %
Data origin – if not otherwise noted:
Thomson Financial Datastream.
Calendar date of data – if not otherwise noted:
December 2012
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