APAC Asset Managers Look to Regional Bonds for Superior Returns and Stability

Asia Pacific (APAC)-based asset owners and managers see abundant opportunities for portfolio diversification and income generation in the bond markets of their home region.

The ABF Pan Asia Bond Index Fund (PAIF) commissioned a survey to dig deeper into the attitudes of APAC-based asset managers and owners towards their region’s fixed income markets.

Overall, 36% of respondents expect fixed income markets in APAC ex-Japan to produce the best returns globally, with 53% of Singapore-based respondents feeling particularly bullish on the region, followed by 39% in China. Respondents perceived Japanese bonds to be the next most likely top performers, with 15% of respondents overall approving them, with Japan-based respondents particularly positive, at 44% (South Korea-based respondents were the next most positive on Japanese bonds, but with only 14%). With 14% of overall votes, respondents deemed North America the third-most likely top-performing bond market this year.

This enthusiasm towards Asian bond markets is unsurprising. Asian bonds have demonstrated higher risk-adjusted returns than their US equivalents. From January 2001 to June 2024, Asian sovereign and quasi-sovereign bonds saw volatility levels of 4.59%, compared with 4.82% for US Treasury bonds. And the former delivered an annualized return of 4.78% versus 3.10% for the latter, both in USD terms according to data compiled by State Street Global Advisors.

Reasons to Invest in APAC

When asked to name the three main attractions of APAC ex-Japan fixed income markets, 33% of respondents cited diversification, followed by income and improving economic conditions, each with 32%. Asset managers and owners in China were the most appreciative of the diversification angle, with 39%, while 40% from that country were attracted to the region’s income opportunities. For 43% of Australian respondents, the region’s improving economy was the top reason to invest.

APAC’s economic diversity has grown from varied rates of development and contrasting areas of industrial focus across the region. China, for example, is a huge economy with a strong manufacturing base. Malaysia is becoming a major center for semiconductor manufacturing. Singapore is a global financial hub and Indonesia is rapidly transitioning from a commodity- to a manufacturing-led economy.

“The beauty of having [exposure to] all of these different markets is that they move at different paces and in different directions. So, while some Asian markets have been in a tightening cycle, China has been more accommodative to support its economy,” says Marie Tsang, ETF Investment Strategist at State Street Global Advisors.

Measuring Investor Confidence

The survey also gauged attitudes towards the eight jurisdictions that make up the Markit iBoxx ABF Pan-Asia Index. These are Hong Kong, Singapore, China, Indonesia, Malaysia, Thailand, South Korea and the Philippines.

In terms of investing in these markets, 72% expressed the highest level of confidence in Singapore, compared with 18% who took a neutral view and 10% who lacked confidence in this market. For Hong Kong, the proportions were 64%, 23% and 13%, respectively, followed by Malaysia with 63%, 24% and 13%, respectively. Overall, APAC asset managers and owners lean more towards high-quality bonds.

Key Concerns

While APAC investors are mostly bullish towards bonds in the Markit iBoxx ABF Pan-Asia Index, they are not looking at these markets through rose-tinted glasses. The top two threats, as cited by 37% of asset managers and owners, are recession and inflation. Concerns about recession are fairly ubiquitous, with those in Hong Kong particularly worried, with 39% citing this concern. Those in Singapore and South Korea are least worried, but 30% in each of these markets still mention recession as a key concern. There is more variation in attitudes towards inflation, with 46% of respondents in China citing this as an issue, and those in Hong Kong and Australian being least concerned, with 25%.

The prevalence of these concerns reflects the fact that global central banks have spent the past couple of years fighting inflation by pushing up interest rates. This is a battle that they appear finally to be winning, a positive sign for the region’s fixed income markets. The flipside of tighter monetary policy, of course, is that it can tip economies into recession.

“In the past, the rate-hike cycle has caused quite a lot of volatility in emerging economies, including Indonesia but, this time, [they have] been much more resilient. Back in 2013 with the Fed’s [Federal Reserve, the US central bank] ‘taper tantrum,’ markets labelled Indonesia among the ‘fragile 5’ due to over-reliance on external financing. But, in the past 10 years, the country has reduced this. There's now a very strong local investor base for the local bond market,” says Andy Suen, Co-Head of Asia Fixed Income and Portfolio Manager at PineBridge Investments.

The next two leading concerns, cited by 35% of correspondents, are geopolitical tensions and currency depreciation. Geopolitics proved particularly troubling for 58% of Australian respondents, with those in Singapore least concerned, with 27%. Australian respondents also fretted the most about currency depreciation (43%), compared with only 30% in Japan who viewed this as an issue.

Geopolitics is a lingering concern, with the US-China trade tensions and ongoing wars in the Middle East and Russia-Ukraine. The business community (as well as society at large) hopes that a sensible measure of self-interest will prevail, leading global powers to contain tensions. Encouragingly, recent smoothly conducted elections in Indonesia and South Korea have demonstrated political stability across much of APAC and policymakers remain focused on the economy.

A Bright Future for APAC Bonds

Currency depreciation is a perennial concern for asset managers and owners investing across borders. However, there are signs that the Fed will soon lower its key benchmark interest rate, relieving downward pressure on many emerging market currencies.

Over the past quarter of a century, policymakers in APAC ex-Japan have strengthened their national economies, capitalizing on globalization to move up the value chain. Fortified by a commitment from many of these countries to sound economic and fiscal policies, bonds within the Markit iBoxx ABF Pan-Asia Index are well positioned to outperform over the long term.

For more insight, read our report: ‘Unlocking opportunity in Asia fixed income’.