Mr Ooi Boon Peng, chief investment officer, fixed income, at Eastspring Investments, discusses the outlook for fixed income and the overall market, in the latest in our series featuring fund managers and market experts.
With almost 30 years of investment experience, Mr Ooi is responsible for overseeing the management of the firm's fixed-income strategies.
Launched in 2011, the Singapore Select Bond Fund aims to maximise total returns over time by investing primarily in Singapore-dollar-denominated debt securities and foreign currency debt securities which are hedged back into Singapore dollars.
It has generated an annualised return of 4.1 per cent since its inception (bid-to-bid), as of March 31 this year.
Q What role should fixed income play in an investment portfolio?
A For investors, fixed-income products are important components in an investment portfolio. Fixed income is a lower-risk investment, provides attractive returns to risk investment funds, has an income-generating role, and lastly, fixed-income investments in high-yield bonds can achieve comparable returns to equities with returns volatility.
Q Can you tell us about your approach to investing?
A Eastspring's approach to fixed-income investment includes both "top-down" and "bottom-up" analysis within an analytical framework that makes use of quantitative and qualitative measures.
By undertaking a comprehensive analysis of fundamental, valuation and technical factors that affect fixed-income markets, we are able to uncover higher-yielding, better-value investments that generate superior long-term returns for our clients.
Q What are some of the important market trends you're currently seeing?
A Two of the major trends we are seeing are:•
GLOBAL CYCLICAL UPSWING AND GRADUAL UPWARD NORMALISATION OF INTEREST RATES
Eastspring has held the view since last year that the United States and global economy are on a cyclical upswing. This upward momentum started before the optimism that followed the Trump reflation prospects after the November 2016 US presidential election.
The US economy was already on a stronger growth path in the second half of last year, helped by the fiscal situation turning more positive and the US labour market steadily getting stronger. This year, what we have been seeing are surges in US consumer and business sentiment that bode well for strong gross domestic product growth.
The China and European economies are also on a cyclical upswing. That being the case, we expect the normalisation of US interest rates to come about in a fairly steady fashion. We note that China's policymakers are fairly positive that their GDP can comfortably hit or exceed their 2017 target growth of 6.5 per cent. This bodes well for Asian growth prospects.
LONGER-TERM GLOBAL ECONOMIC PROSPECTS MAY NOT BE ROSY
While markets are experiencing a cyclical upswing, the underlying strength of global growth in the long term is less certain. Companies that generally have high levels of cash are restrained in their capital expenditure, given a lack of confidence in the political situation.
In the US, investors may be optimistic based on the expectation of reflation, but the confidence in the Trump presidency is unclear.
Neither is there confidence in the political prospects of the euro zone, as increased support for far-right parties makes investors uneasy about the stability of the European Monetary Union. Productivity levels may not revert meaningfully from current depressed levels.
Meanwhile, long-term trend growth rates are falling due to global ageing demographics. This means projections of lower yields compared with historical experience are probably a fair assumption.
Q Among fixed-income markets in Asia, where do you find the most attractive opportunities and the biggest risks?
A At Eastspring, we see long-term stability and strength in Asian currencies. We believe continued reforms in India, China and Indonesia will bring about stronger, better-quality GDP growth. Historically speaking, Asian currencies are at cheap levels, given the rise in the US dollar since 2013.
We anticipate China steadily moving towards increased openness of its fixed-income market and the eventual free float of its yuan. India's bond market, with a lag, should see it having more foreign interest. This will provide international investors with two large liquid markets offering attractive yields.
The main threat is whether China can sustain its growth targets without a GDP recession. We question whether the authorities can continue to depend heavily on credit growth and infrastructure spending to sustain growth. Without a decided move to contain and cut corporate debt levels, the systemic risk in China will continue to increase.
Q What are the key risks associated with your funds and how do you manage these risks?
A Credit investments generally have the most significant exposure to risk for fixed-income funds. Currently, credit spreads are narrow, which makes corporate bonds historically "expensive".
Consistent with this, S&P 500 valuation levels are on the lofty side of historical experience. In part, the high level of central bank liquidity has created this situation. Any correction in US stock prices can lead to a widening of credit spreads.
At Eastspring, we are managing this risk by reducing corporate bond exposures in favour of government bonds on any narrowing of credit spreads. We are also moving to hold more higher-quality corporate bonds for the long term.
Investors should be mindful that if a global economic hard-landing scenario comes about, there will be a sharp widening of credit spreads. Under such conditions, there will be little trading liquidity in the bond market. Investors need to hold their bonds for the longer term, until calm and economic normalcy are restored.
Q In view of likely US interest rate rises, how are you managing your funds? How will these rate rises impact Asia?
A Given Eastspring's view that inflation will not be a long-term problem and our concern that long-term global growth vitality could be lacking, we believe Fed tightening will be gradual.
We see the Federal Open Market Committee's projection that the Fed funds rate will reach 3 per cent in 2019 from 1 per cent currently as a reasonable prospect.
Asian countries, on the whole, would not match one for one the Fed rate rise, while regional bond markets would hold up well on the prospects of a "gradual" Fed and relatively dovish Asian central banks.
We see US and Asian rates rising to more attractive levels over the next two years, but overall bond returns staying pretty much positive.
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