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AM Heat Map: Hard currency Asian bonds remain in favour despite USD weakness

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Traffic data suggests that relative to local currency credit, demand for hard currency Asian bonds is trending upwards, despite the US dollar losing ground in the first half of 2017, according to APB Mandate’s latest Asset Management Heat Map.

APB Mandate seeks forward-looking trends in its latest Asset Management Heat Map, an exclusive weekly column analysing regional fund demand based on internet traffic data provided by fundinfo.

Amongst both hard and local currency bond fund traffic in the Asia Pacific, hard currency bond funds dominate, with their share of traffic holding firm at above 70% throughout the past two years. Hard currency bond funds have seen their share of traffic climb further since April to account for nearly 90% of all traffic, according to 1-year, 1-week rolling data.

Meanwhile, APAC local currency bond fund traffic has gradually slipped since April to less than 10%.

Currency risks
FX volatility in Asian local currency bonds remains higher than in the US, despite the greenback’s weakening this year.

This has made risk-adjusted returns for Asian hard currency bonds more attractive than local currency alternatives, says Neeraj Seth, head of Asian credit at BlackRock.

“Asian hard currency bonds provide a broad-based diversified exposure across sovereign, quasi-sovereign, financials, investment grade and high yield corporates in the region to investors, offering higher flexibility in terms of portfolio construction based on underlying investor needs,” Seth says.

Further, with the US dollar remaining as the base currency for many investors, making it relatively easy for investors to hedge local currency FX risks, hard currency bonds, particularly those denominated in US dollars, are relatively more attractive.

Luc Froehlich, head of investment directing for Asian fixed income at Fidelity International, adds that Asian hard currency bonds offer better liquidity as well.

US dollar oversold?
The US dollar tends to have a profound impact on other asset classes, particularly emerging market bonds. The greenback has declined this year, with the US dollar index (DXY) trading at 95.7 today, from 102.8 on 2 January.

However, a number of private banks believe that the US dollar will rebound in the second half of 2017. A strong US dollar tends to put more pressure on Asian local currency bonds, which face greater FX risks when the currency appreciates, compared with hard currency bonds.

Lim Say Boon, CIO at DBS, said at a media brief recently that the USD “is oversold”. Rising interest rates in the US, where the Fed has taken a different monetary policy approach to other major central banks, suggests a stronger US dollar going forward, he said.

Credit Suisse Private Banking holds a similar view and expects one more rate hike this year, in the fourth quarter, and three in 2018, which would buoy the US dollar.

“Despite the recent rise in EURUSD on a reduced European risk premium and better eurozone data, we see the USD gradually regaining strength against the EUR and CHF, with US macro data expected to rebound and the Fed to tighten further,” Jack Siu, APAC investment strategist at Credit Suisse Private Banking, tells APB Mandate.

For investors banking on Fed rate hikes, Asian hard currency bonds represent an appealing proposition, Froehlich says. “Asian issuers will benefit from a global growth pick-up and the USD-denomination of their bonds will shelter them from the volatility potentially generated in EM currencies.”

PB client demand to rebound?
“PB client demand for Asia hard currency bonds has been somewhat weaker this year,” Froehlich says, adding that in terms of private banking demand, Fidelity International does not believe that the past 12 months are a good indicator of future trends.

Froehlich says lacklustre demand this year is partly due to concerns over China’s growth. However, as private banking clients are still looking for higher total returns, they could soon consider reducing their exposure to US high yield credit and US loans, and be pulled back into Asian USD-denominated bonds.

“For investors betting on the stabilisation or even improvement of global economic growth, including Chinese growth, the Asian HY market will stand out as an attractive proposition with its strong income generation capability as well as contained volatility,” Froehlich says, adding that for more cautious investors, the Asian investment grade market will likely act as a relative safe haven while still delivering attractive returns.

BlackRock’s Seth tells APB Mandate that private banking demand for investment grade credit across the region has remained stable over the past 12 months, although an increase in high yield bond demand was noticed in the second quarter of this year.

“The increase [in high yield bond funds] has been driven by a combination of higher redemptions in 2Q17 as well as the increase in high yield issuance across corporate and financials in the region.”

Traffic data suggests that no single asset manager dominates the Asian hard currency bond space, which appears competitive.

The top 5 funds are:

APB Mandate will share its weekly view on the state of fund demand within the private banking industry from both a regional and global view. For an overview of the top 10 trending funds, fund categories and asset managers (1-year, 1-week rolling), see the following:

RankPeer groupShare
1World, Aggregate (Bond / Multi Currency)10.74%
2USD, Strategy Balanced (Portfolio Funds)10.36%
3Asia/Pacific, ex Japan (Equity / Regions)6.63%
4World, High Yield (Bond / Multi Currency)5.46%
5World (Equity / Regions)4.89%
6Multi Strategy (Liquid Alternatives)4.79%
7Europe (Equity / Regions)4.23%
8Asia/Pacific, External Debt (Bond / Multi Currency)3.42%
9China (Equity / Countries)3.17%
10USD, High Yield (Bond / Single Currency)2.98%
6Allianz Global Investors5.52%
7J.P. Morgan Asset Management5.49%
8Franklin Templeton4.94%
9Lion Global Investors4.42%
10First State3.96%
1PIMCO Funds GIS plc - Income2.70%
2Pictet - Robotics2.01%
3M&G IF (7) - M&G Global Floating Rate High Yield Fund1.52%
4Pictet - Security1.31%
5M&G Optimal Income Fund1.20%
6FF - Global Multi Asset Income Fund1.02%
7Carmignac Sécurité0.91%
8JPMorgan Investment Funds - Global Income Fund0.86%
9FTIF - Templeton Global Total Return Fund0.80%
10BlackRock BGF - Global Multi-Asset Income0.79%
RankPeer groupShare
1World (Equity / Regions)7.64%
2World, Aggregate (Bond / Multi Currency)6.30%
3Multi Strategy (Liquid Alternatives)5.43%
4Europe (Equity / Regions)4.84%
5Technology (Equity / Sectors)4.72%
6World, High Yield (Bond / Multi Currency)4.49%
7USD, Strategy Balanced (Portfolio Funds)3.33%
8CHF, Strategy Balanced (Portfolio Funds)3.07%
9Switzerland (Equity / Countries)2.47%
10USA (Equity / Countries)2.47%
1Credit Suisse AM5.82%
8M&G Investments3.52%
9J.P. Morgan Asset Management3.28%
10Franklin Templeton2.80%
FundTraffic share
UBS (Lux) Equity Fund - China Opportunity (USD)25.95%
BlackRock BGF - China7.78%
FF - China Focus Fund6.78%
Neuberger Berman Inv. Funds Plc - China Equity5.65%
Robeco CGF - Chinese Equities4.16%
Schroder ISF - Hong Kong Equity3.59%
First State Global Umbrella Fund plc - China Growth3.45%
Schroder ISF - China Opportunities3.38%
JPMorgan China Income Fund3.22%
Value Partners FS - Value Partners China A-Share Select3.21%

*Traffic data from APB Mandate’s AM Heat Map is provided by trendscout, a data tool offered by fundinfo, the world’s largest digital library of fund documents. trendscout’s data is based on document downloads from users of various geography and types (i.e. public, financial institutions, etc.). In the case of the AM Heat Map, data is based on traffic from financial institutions into documents downloads specified for both investors domiciled globally and regionally (Hong Kong and Singapore) on a 1-year 1-week rolling basis.

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