May 28, 2019 Bonds

Asian bonds – returns that are out of this world

In many industrialised countries, returns on bonds have fallen to a level that barely covers inflation. If you are looking for higher returns, Asia could be the answer.

  • In the past, Asian bonds often only played a minor role in international markets.
  • Conditions have since improved, and Asian bond markets now have both greater range and depth.
  • Dollar-denominated Asian corporate bonds are particularly attractive right now.
4 minutes to read

China has modernised its economy at breathtaking speed. Since opening up to the rest of the world around 40 years ago, the country has grown at a vigorous pace to become the second largest global economic power behind the US[1]. As other up-and-coming countries in the region have also become more important in recent years, the global economy’s centre of gravity is slowly but surely shifting from west to east, towards Asia.

The right risk and return mix is crucial

Opportunities in the region are not confined to equity markets; fixed-income investors can also hit the jackpot. This is particularly the case at a time when fixed-income securities in Western industrialised countries offer very little, due to central banks’ low interest rate policies. Investors should, however, remember that emerging-market bonds are generally higher risk than developed-market bonds. It therefore seems advisable to diversify the invested capital, for example through funds.

Holding a mixture of investment-grade corporate bonds and speculative high-yield bonds can deliver an attractive return.

Asian US dollar-denominated corporate bonds form a particularly interesting segment. The advantage of dollar-denominated investments is that valuations remain unaffected by fluctuations in local currencies, such as the Chinese renminbi or the Indian rupee. Returns can also potentially be improved by adding more speculative high-yield corporate bonds to the portfolio alongside bonds from issuers with good credit ratings.

The Asian bond market is maturing at a fast pace

A large selection of Asian bonds is now on offer. Markets have benefited from significantly improved economic conditions. Increasing affluence in emerging markets means that issuers are increasingly bringing dollar-denominated bonds to the market. There are in demand with a broader investment community, including local pension funds, insurance companies and international investors. "This ensures higher issue volumes and diversity, creates stability in the segment and helps to mitigate intermittent setbacks," explains Henry Wong, who manages the DWS Invest Asian Bonds fund from Hong Kong. This fund invests overwhelmingly in corporate bonds, most of which come from countries such as Indonesia, China and India. However, some bonds from more mature economies such as Australia and Japan are also included in the portfolio.

Economic change brings opportunities

The manager of the DWS Invest Asian Bonds fund takes a realistic view of the trade war that the US is currently waging against China. "It is understandable that this will create unrest in the markets, but we cannot avoid reality," says Wong. In his view, trade surpluses in China and other Asian countries will no longer be as high in future. This is simply because the country will probably refocus its economic model in the long term away from exports and towards greater domestic consumption on a more sustainable basis. This may put pressure on some traditional industrial sectors, but it could also create attractive investment opportunities in newly created segments.

To pick the best bonds, Wong suggests concentrating less on overall global economic conditions and more on the-specific features of corporate issuers. Above all, investors should focus on companies with a solid balance sheet, robust cash flow and reliable management. Wong is concentrating on sectors that can benefit from the expanding middle classe and growing propensity for consumption in Asian countries. This makes an investment far less dependent on global economic trends and the effects of potential trade wars.

The expanding middle class in Asian emerging markets shifts the emphasis away from export sectors towards consumer sectors. This could present attractive investment opportunities.

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1 . Source: Statista; as of 2018.

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