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Asian Bond Outlook Remains Positive in 2018

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This is a sponsored article from State Street Global Advisors.

With interest rates remaining low, investors continue to look beyond traditional income sources, moving further out on the risk spectrum to meet their long-term targets.

Among higher yielding investment choices, Asian local currency bonds have generated pretty consistent returns over past years, according to Kheng Siang Ng, Asia Pacific Head of Fixed Income at State Street Global Advisors.

“If you look back at the historical performance of Asian local currency bonds, they have been generating close to 6% return on a per annum basis,1” said Ng.

In a recent interview, Ng talked about the outlook on Asian fixed income and specific opportunities in local currency bond markets.

Q: What have been — and will continue to be — the key drivers?

A: Returns of the Asian local currency bond markets have been mainly driven by Asian currency appreciation, as well as ongoing improvements in the underlying markets. For instance, we have seen economic reforms in Asian countries, which have led to rapid improvements in fundamentals. These contribute to the stability in the growth of the Asian economies, as well as the further deepening of the Asian debt capital markets.

These factors alone will continue to drive investors’ confidence in this region. And we have also witnessed that investor inflows into Asia have been increasing at a very steady pace.

In the long run, the rise of Asian economies and the Asian bond markets will feature as part of the core allocation of global investors.

Q: What is your outlook for Asian bonds in 2018?

A: Against the backdrop of robust economic growth in Asian economies in 2017, plus the modest uptick in inflation, we expect that Asian central banks will gradually tighten monetary policy. While we don’t think this will be the start of a major bear bond market, we expect that the rise in Asian bond yields will be gradual.

At the same time, we anticipate that Asian currencies will continue appreciating – albeit at a more modest pace compared to 2017. And we will be looking at investors getting into Asian bonds to invest in the local currency bond markets over a longer time horizon. This would allow investors time to reap the benefits of the appreciation of the Asian local currency bond markets.

Q: What are the specific opportunities that you see in Asian local currency bonds?

A: In the Asian local currency space, we think there may be further currency appreciation potential. In addition, we see some opportunities in pockets of Asian markets. For example, we are looking at the Korean bond market which has priced in some rate hikes at the moment, but we expect the bond market will reflect a more gradual pace for interest rate hikes over time.

Another major development is the inclusion of the Chinese fixed income market into the global bond universe. This is one of the major developments that global investors are closely monitoring. As such, we expect that the overall sentiment towards the Asian fixed income market will remain positive.

Q: What are the key risks that investors should pay attention to?

A: Asian investors should be looking out for a swing in investor sentiment. We think this will be one of the biggest market events that investors will need to pay attention to.

As the US has raised interest rates, there will be policy responses from Asian central banks and different market reactions from investors. The key to that is to monitor the interest rate risk sentiment, as well as the capital market flows.

Q: How do Asian bonds correlate with other asset classes, such as global equity and global fixed income?

A: Traditionally, Asian currency bond markets have low to negative correlation with developed bond markets and other asset classes. This is mainly due to the fact that Asian economies are developing in a different fashion from more mature markets.

At the same time, policymakers – including the Asian central banks and the governments – are reacting to various policy responses that pertain to the local market development. Over the medium to long term, we expect that the low to negative correlation of Asian bonds will continue to provide strong diversification benefits to global investors in their asset allocation decision making.

Invest in Asian local currency bonds with ABF Pan Asia Bond Index Fund. Visit www.abf-paif.com to learn more.

1 Source: Markit iBoxx ABF Pan-Asia Index and State Street Global Advisors, index data from January 2001 to November 2017. Past performance is not a guarantee of future results. Index returns reflect capital gains and losses, income, and the reinvestment of dividends.

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