Asian Fixed Income Global Investor Survey (Part 1): An increasingly attractive investment harbour in stormy financial seas

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This is a sponsored article from State Street Global Advisers.

Kheng-Siang Ng
Asia Pacific Head of Fixed Income
State Street Global Advisors

An extensive global survey on Asian fixed income by Greenwich Associates1 threw up some intriguing results. The study found almost 60% of respondents already had an allocation in Asian fixed income and nearly all of them planned to increase or maintain exposure to the asset class over the coming 12 months.

The two key reasons for the growing appeal of Asian fixed income, the study found, were the higher yields compared to other fixed income assets combined with the favourable long-term macro outlook of the region. Asian bond markets are also maturing rapidly, becoming more liquid and better integrated into the broader universe of global fixed income. These factors, it indicated, will continue to fuel demand.

An unfulfilled yearning for higher yields
Central banks have kept interest rates at near-historic lows for almost a decade, triggering a global hunt for higher-yielding investments. Asian fixed income has been one bright light in this firmament, with 18% of global institutional and private banking fixed income assets allocated to Asian bonds, 13% of which has gone to Asian credit and the remainder to government issues. Asia ex-Japan investors have displayed the strongest demand, with regional private banks apportioning a significant 51% of fixed income assets to Asian bonds and 26% among institutional investors. Allocations from outside of the region are moderate but growing. Asian bonds comprise 7% of fixed income exposure in Europe and the US, while the asset class comprises 3% of Japanese investors’ and 2% of Australian investors’ bond allocations.

A rising tide of interest
These allocations are expected to expand, the survey found, with a total of 95% of existing investors planning to either increase (41%) or maintain (54%) their exposure to Asian fixed income in the coming year. Interestingly, every survey participant from the US or Europe said they intended to retain or augment their Asian bond holdings during this period, reflecting in part the more accommodative stances of the US Federal Reserve (Fed) and the European Central Bank (ECB). The Fed left rates unchanged in early May, with Chairman Jerome Powell stating that officials are “comfortable” with their current policy position. Following a Eurozone economic growth downgrade by the International Monetary Fund, the ECB also held its policy steady at its April meeting. Meanwhile, ECB President Mario Draghi warned recent data had confirmed “slower growth momentum” in the region.

Only around 5% of Asian fixed income investors said they expected to trim their exposure in the year ahead, while around a quarter of respondents who did not hold Asian bonds intended to stake a claim in this asset class.

A long-term strategic shift
It is clear that continuing low yields in the US, Europe and Japan have benefited Asian fixed income. Within local currency Asian government bonds, more than 75% of those surveyed stated a target yield enhancement of at least 100 basis points over US Treasuries, while nearly one-third said they expected a pick-up of more than 200 basis points.

However, the decision by investors to increase their exposure to Asian bonds is more than just a short-term yield play. Given the long-term growth prospects of the region and the decades of development and progress in Asian bond markets, these decisions point to a broader secular shift in investment strategies.

Only 3% of respondents who planned to increase or initiate allocations said these investments were tactical or planned for less than one year. With no evidence of a near-to-medium-term recovery in global rates, the rapidly maturing and easy-to-access Asian fixed income market is thriving and looks set to continue to be an enticing source of better yield for investors around the world.

Visit www.abf-paif.com/survey* to access the full Greenwich Associates Study Report

1 State Street Global Advisors commissioned Greenwich Associates to conduct a global study of 151 institutional investors and 36 intermediary distributors from Asia Pacific, Europe and the United States between October 2018 and March 2019.

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This is a sponsored article from State Street Global Advisors.

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