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Short duration bonds in Asia are likely to yield attractive risk-adjusted returns going forward, largely due to improving fundamentals and favourable monetary policies across the region, according to AXA Investment Managers (AXA IM), one of the leading asset managers with strong expertise in short duration bonds.
“On an index basis, it would be challenging for Asian bonds to outperform the rest of their emerging market peers as Asian bond valuations are at tight levels on a number of metrics,” according to Jim Veneau, AXA IM’s Head of Fixed Income for Asia and manager of the firm’s Asian Short Duration Bonds strategy.
“However, given discretion at the sector and issuer level, it is possible for Asian fund managers to outperform Emerging Market fund managers; and on a risk-adjusted basis, Asia compares favourably,” Veneau said.
Unlike developed market central banks – most notably the Federal Reserve, European Central Bank and Bank of England, which are gearing up to lift rates and taper their asset purchases – monetary authorities in Asia have retained their accommodative policy stances.
The People’s Bank of China, Reserve Bank of India and Bank Indonesia have been proactively providing liquidity and limiting volatility in their respective markets, Veneau says, noting that the divergence between major developed market and emerging market policies bodes well for the region’s credit market and is likely to keep Asian investors interested in the asset class.
In addition, the long-term transformation of the Chinese, Indian and Indonesian middle classes will fuel economic growth in the region, which should provide a further boost to local credit markets.
Short duration strategies to gain in popularity
However, AXA IM believes that given potential risks – particularly a strengthening US dollar against Asian currencies and geopolitical tensions between North Korea and the US, which are likely to promote volatility – short duration bonds may help to play a mitigating role by reducing exposure to business cycles and aiding cash flow management.
“Investing in Asian short duration bonds allows us to make higher conviction bets further down the credit curve and pick up incremental yield,” Veneau said.
AXA IM is one of the market leaders in short duration fixed income strategies, managing over €25 billions (as at 31 July 2017) across ten short duration strategies since 2001.
Find out more about AXA IM Short duration range
Sources: AXA IM as at October 2017
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This is a sponsored article from AXA Investment Managers.
