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Asian Bonds – Assessing Regional Drivers and Opportunities

Events in Asia’s leading bond markets can distract investors from developments elsewhere. For balance, we take a look at the broader regional landscape.

Asia Pacific Head of Fixed Income, Head of SSGA Singapore

There will always be bond markets that dominate the headlines. In Europe, it’s Germany, France, or the UK, while in Asia, Mainland China, Hong Kong SAR, and Singapore are at the forefront of news reports. However, the big-player narrative can cloud less prominent territories.

Yield Movement Drivers

As with all bonds, the higher the risk, the greater the potential yield. Risk is in the eye of the beholder (or bondholder) and is not only looked at in credit terms because a sovereign local-currency bond will usually be repaid.

The Philippines is a good example where investors expect a relatively high yield to hold its government bonds because they believe that future inflation may rise. This could see the Philippine peso decline against major currencies, like the US dollar. At the time of writing, the Philippine 10-year government bond offers a yield of over 5%, while investors in the equivalent Malaysian bond will accept a yield of less than 4%1.

Assessing Market Risk

Investors will often look at a market’s current account, which measures how much it receives in income versus how much it spends – ultimately, spending cannot permanently exceed income. A current account surplus is a positive sign, although it will swing from month to month as exports and imports naturally shift. Indonesia recorded a higher current-account surplus in 2022 because of firm commodity export prices2. As a percentage of gross domestic product (GDP), it was the biggest surplus since 2009. Due to surging exports, China achieved a surplus of 2.3% of GDP in 2022 – the highest percentage in 14 years3.

Another factor market participants may also consider are government debt to GDP ratios. This encourages governments to spend wisely and to ensure they are efficient in collecting taxes to maximise their income. It also encourages governments to promote GDP growth, putting downward pressure on the debt-to-GDP ratio.

In Southeast Asia, debt expressed as a percentage of GDP in 2021 ranged from 35.88% in Cambodia to 63.4% in Malaysia – this placed them 137th and 74th, respectively, in the global rankings. These numbers are not excessively high and reflect an element of regional prudence.

On the flip side, some markets have unique circumstances, which means they can maintain a high debt-to-GDP ratio – Singapore is ranked 6th globally but drill beneath the surface, and we see that the government invests its debt proceeds and has assets that comfortably outweigh liabilities4.

A Positive Outlook – but Differences Exist

Developed markets in Asia can expect growth to be lower than for less economically developed territories. A good example is Singapore and Vietnam. The International Monetary Fund (IMF), in its April 2023 World Economic Outlook report, expects real GDP growth in 2024 of 6.9% in Vietnam but only projects a rate of 2.1% in Singapore5. This does not mean that Singapore is weak while Vietnam does well – instead, it reflects the different stages of economic development between the two markets.

Diverse Asia is Reflected in GDP Per Capita

Depending on the level of economic development, markets in Asia display a wide variety of wealth. This is often calculated by looking at GDP divided by the size of the population, known as GDP per capita.

The IMF estimates world GDP per capita in 2023 to be US$13,440. Markets in Asia show significant variation. For instance, Hong Kong SAR GDP per capita was projected to be US$52,430, while in mainland China, it is US$13,720, and in Thailand, US$8,1806.

Stability and Resilience

To demonstrate how far Asian bond markets have come from past economic crises, during the H1 2023 banking sector problems in the US and Europe, commentators noted that emerging-market Asian bonds provided a welcome refuge for those fleeing the turmoil in major debt markets. Investors were confident they’d be repaid (lower credit risk), and the region had generally benign inflation7.

A Diverging Economic Outlook

For investors seeking diversification away from European and US bond markets, Asia offers a different outlook, which may be founded more on beneficial demographic tailwinds and rapidly advancing technological capabilities rather than historic strengths in capital, business, and industry.

The economic development of markets rarely takes a smooth and predictable path. Instead, it is often an undulating road whose direction is dictated by global economic and domestic events. Yet, this uncertainty offers investors potential rewards. Local-currency government bonds in select Asian markets can provide a relatively attractive way of accessing these economic opportunities.

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