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Asian Bond Watch

Global Investor Study (Part 1): A Broadening Investor Base, Expanding Allocations
3 Jun 2019

A new Asian fixed income survey from Greenwich Associates1 reveals that close to 60% of respondents already have an allocation to Asian fixed income. Indeed, nearly all of these existing investors plan to increase or maintain their exposure in the next 12 months.

The key reasons for this growing appeal? Study participants select higher yields compared to other fixed income assets and favourable macro view on Asian fixed income are the key attractions. In addition, Asian bond markets are maturing rapidly, becoming more liquid and better integrated into the broader universe of global fixed income, most recently with the inclusion of Chinese bonds into major global indices. All of these will fuel further demand.

Local private banks dominate Asian bond allocations

Major central banks around the world have kept interest rates at or near historic lows for nearly a decade, triggering a global hunt for higher-yielding investments. Asian fixed income is providing investors with some respite, with the survey showing that 18% of global institutional and private banking fixed-income assets are allocated to Asian bonds, 13% of which is in Asian credit and the remainder in government issues. Asia ex-Japan investors have shown the strongest demand, with local private banks apportioning a significant 51% of fixed income assets to Asian bonds and institutional investors earmarking 26%. Allocations from outside of the region are moderate but growing with 7% from Europe and the United States, 3% from Japan and 2% from Australia.

Accommodative central bankers boost focus on Asia

These allotments are, however, expected to expand, with 95% of existing investors planning to increase (41%) or maintain their exposure (54%) to Asian fixed income over the next 12 months. What’s interesting is that every study participant from the US or Europe intends to retain or augment their Asian bond holdings during this period. This partly reflects 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 Fed 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 that recent data had confirmed “slower growth momentum” in the region.

In fact, only 5% of Asian fixed income investors are expected to trim their exposure in the coming year. Meanwhile, around a quarter of respondents who currently do not invest in Asian bonds have plans to initiate an allocation to this asset class.

A secular shift in investment strategies

Prevailing low yields in the US, Europe and Japan have benefited the Asian fixed income asset class. For example, within local-currency Asian government bonds, over 75% of those asked stated a target of at least 100 basis points (bps) of yield enhancement over US Treasuries, while nearly one-third say they are looking for a pickup of over 200 bps.

However, the decision by investors to increase their allocations 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 plan to increase or initiate allocations say these investments are tactical (or less than one year). Moreover, with no real evidence of a near-to-medium-term recovery in global rates, the more mature and easy-to-access Asian fixed income market will continue to be a vital source of yield for investors across the world.

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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