Asian bonds are where the money is for investors

Mr Seth says the two things to watch out for - where Asian bonds are concerned - are actions by the US Fed and China.
Mr Seth says the two things to watch out for - where Asian bonds are concerned - are actions by the US Fed and China.ST PHOTO: LAU FOOK KONG

Mr Neeraj Seth, head of Asian credit at asset manager BlackRock, shares his outlook on emerging market currencies and bonds in the latest in our series featuring fund managers and leading market experts.

In their search for yield, investors have flocked to Asian bonds, given that interest rates are low around the world and unlikely to change anytime soon, said Mr Neeraj Seth.

"If I take a step back and go back to fundamental drivers of what's causing the flows to Asia - it's a combination of a low rate environment and monetary policy in developed markets, which is injecting more liquidity and taking away a lot of fixed-income instruments from investors," he said.

"Couple that with the ageing demographics in the world, it puts more pressure on the need for income."

His fund, the Asian Tiger Bonds, is BlackRock's core credit flagship in Asia, investing in credit markets across the region, excluding Japan.

It was launched in 1996 and became available to retail investors here in May 2014. As at Sept 30, the fund had notched up an annualised yield of 6.87 per cent since its launch.

Q What do you like in the Asian bond markets?

A In the credit markets, we've been positive on India, Indonesia and some of the selected frontier markets like Sri Lanka. This is where we have the fund positioning long, compared to the benchmark.

In the low-growth environment, India continues to be a bright spot with real gross domestic product (GDP) growth above 7 per cent, with a positive trajectory.

The overall growth story is built on three key pillars. Firstly, it has political stability and an agenda with some significant reforms, such as the bankruptcy Bill (designed to make it easier to wind up a failing business in India), as well as a number of smaller reforms focusing on the ease of doing business.

Secondly, it enjoys macroeconomic stability with a significant adjustment in the current account deficit, increase in foreign domestic investment, as well as a focus and commitment to the fiscal consolidation path. Thirdly, its young demographic is supportive of initiatives such as Make In India and its overall growth outlook.

Q The proportion of Sri Lanka in your fund is almost three times that of the benchmark. Why are you so bullish on Sri Lanka?

A Sri Lanka is a situation that's evolving. If you look at the economy, there's decent growth, but the issues facing the economy have been around its fiscal discipline and, to some extent, its macroeconomic stability. Because of these concerns, we thought that it gave decent value three months ago, but they have rallied a lot, so you have to keep an eye on the fundamentals.

We like the proactive approach taken by the Sri Lankan central bank to tighten monetary policy to curb credit growth. In addition, the government approved amendments to the Value-Added Tax Bill recently, but how that is being implemented is an area that we are keeping an eye on.

The key to macro-stability in Sri Lanka is fiscal discipline and there are two parts to the equation, the second of which is the reduction of fiscal expenditure. This is an area which we are monitoring closely.

Q Is the Asian bond market overheated?

A You do see some pockets of richness in the market. The flows have been strong in Asia and accelerated this year.

The need for income in an environment where you have a lot of fixed-income instruments in negative territory is what is leading to the flows. That is not specific to Asia - the flows have gone to all parts of the world. Asia has benefited disproportionately because Asia is on a stronger footing than other parts of the world. When you look at the macro-stability of Asia, its credit fundamentals and valuations, it looks attractive.

Going back to richness, we have a large underweight in South Korea, Singapore, the Philippines and Malaysia. For Malaysia, we are underweight because of the valuation and political noise. Singapore, South Korea and the Philippines are fundamentally strong, but the valuations have started to look expensive.

Q Amid the upcoming United States presidential election, how has the Asian bond market reacted and how do you expect it to react post-election?

A Volatility in Asian credit remains low despite idiosyncratic news elsewhere. While credit risk premiums are slightly higher as compared to the levels seen in August, it remains significantly lower than the levels seen in the sell-off earlier this year.

Asian credit is well placed to weather the volatility. Furthermore, the majority of investors in Asian credit are anchored in Asia, where cash levels are still high. We expect any pullback in Asian credit on the back of the US election to be shallow and temporary.

Q What kind of risks will cause Asian bond markets to do less well?

A A December Fed hike is still on the table, but this has been gradually priced in over the past two months. What is critical is the pace of policy tightening, which we expect to be much more gradual as compared to previous cycles.

The other risk factor is China. When you think of the last two or three years, the two factors that have caused turmoil in the market have been either the Fed, or driven by China such as the turmoil in January and February this year due to yuan movements. If I simplify it to the core, those are the most important factors to keep an eye on.

A version of this article appeared in the print edition of The Sunday Times on October 30, 2016, with the headline 'Asian bonds are where the money is for investors'. Print Edition | Subscribe