While Asian economic growth is slowing, the region continues to outpace the rest of the world. According to the International Monetary Fund’s (IMF) latest world economic outlook, developing Asia is set to expand by 6.2 per cent in 2019 and 2020, faster than the global growth forecast of 3.2 per cent in 2019 and 3.5 per cent in 20201.
The size of China’s economy is expected to increase by 6.2 per cent this year before rising 6.0 per cent in 2020, while India will be the regional pacesetter with growth of 7.0 per cent and 7.2 per cent, respectively, the IMF said.
For investors keen to tap Asia’s rapid expansion through the debt market, BlackRock's BGF Asian Tiger Bond Fund seeks out the best opportunities in government and corporate bonds while ensuring a steady stream of income with low volatility.
We speak with Mr Neeraj Seth, BlackRock’s Head of Asian Credit, and Portfolio Manager of the BGF Asian Tiger Bond Fund to learn more about the Fund.
How does the BGF Asian Tiger Bond Fund generate returns?
The BGF Asian Tiger Bond Fund lets investors tap into Asia’s faster growing economies by investing predominantly in US dollar-denominated credits. The Fund invests in both investment grade and high-yield bonds but keeps an overall investment grade rating to reduce downside risks. For investors in Singapore, the manager offers Singapore dollar-hedged share classes to allow investors to access the market without taking on volatile FX risks.
The Fund shifts dynamically between government and corporate bonds and across geographies, giving the manager flexibility to adjust asset allocation based on changing market opportunities. It is this flexibility that allows the manager to generate attractive income across different market conditions while mitigating downside risks.
As at end-August, the Fund has a one-year return of 10.2%.and an annualised three-year return of 3.3%2.
What are the long-term catalysts for Asian credit?
28% of global fixed income3 trade at negative yields, which mean buyers will lose money if they hold the bonds to maturity. This means that it is increasingly difficult to find quality income in this world and Asian Credit continues to be an area where investor can get attractive income with low volatility.
As Asia’s population ages, there is strong demand for investments that can offer stable income. Quality bonds would remain in high demand even as the market prices in the risks arising from economic and geo-political uncertainties.
In Asia, sovereign fundamentals as a whole remain supportive, and the region is on a stronger footing compared to other emerging markets. In addition, corporate fundamentals remain stable with corporates broadly on a deleveraging trend.
BlackRock is positive on the three major economies in the region: China, India and Indonesia. While growth is on a downward trend, it remains higher vis-à-vis developed markets and policymakers have the tools, capacity and credibility to ease policy. This is positive for bonds, keeping yields anchored.
Is Asian credit resilient to market volatility?
Asia’s economic fundamentals are strong while credit metrics are resilient and supportive for the region. The Fund sees lower risks of downgrades and defaults compared to other emerging regions of the world.
Asian bond investors are mostly domestic, providing a stickier investor base that is less likely to redeem investments and draw down funds during times of uncertainty. According to estimates by JPMorgan, about 70 to 80 per cent of investors in Asian credit are from Asia4.
Asian credit5 and the BGF Asian Tiger Bond Fund have returned negative performance in only two years of the past 10 years.
What are the opportunities that we see?
We are mindful of global geopolitical risks and prefer quality carry across the investment grade and high yield spectrum across US dollar-denominated Asian credits. Given the strong fundamentals and support from regional investors, we find Asian sovereign and corporate credit an attractive asset class for income-seeking investors. We prefer defensive sectors and remain mindful of export-oriented sectors that could be negatively impacted by trade tensions between the US and China. Among local currency bonds, we remain positive on markets like China, India and Indonesia where we see room for further easing while actively mitigating currency risks in the portfolio.
Find out more about BlackRock's BGF Asian Tiger Bond Fund here.
1IMF World Economic Outlook, July 2019
2Performance is shown for A2 Shares, net of fees, in USD, on a NAV price basis with income reinvested, and annualized for periods greater than 1 year. Performance after 5% sales charge is 4.70% (1-Year) and 1.57% (3-Years). Data as of 31 August 2019
3As represented by the Bloomberg Barclays multiverse
4JP Morgan Bond Radar, as of May 2019
5JP Morgan Asian Credit Index
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