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Comment: Asian ‘engine of growth’ offers attractive rewards to debt investors

Baring Asset Management (Barings), the international investment management firm, believes that as Asian economies continue to strengthen, Asian debt and currencies can provide some of the best absolute and risk-adjusted returns versus US and other global fixed income sectors.

Thomas Kwan, Head of Asian Debt at Baring Asset Management comments:  “Asian debt, both local government and US dollar corporate, has been less volatile than emerging market debt and this stability has enabled the sector to deliver superior risk-adjusted returns in comparison to some other asset classes. We believe that the Asian bond market continues to offer attractive risk-adjusted returns for investors and we expect currency appreciation to be an important source of outperformance.”
Barings believes that global debt investors are increasingly shifting their structural allocations to Asian debt.   This increase in demand along with credit rating upgrades potential and attractive yields are strong supporting factors for Asian debt securities.
 
Thomas continues: “Despite recent inflows, Asian debt remains underinvested. Most developed market pension funds have limited exposure to this asset class and with assets under management totalling around US$16tn, even a small increase in allocation will lead to a marked increase in future inflows. We expect this to be further supported by the gradual relaxation of investment restrictions in China and India. With credit quality improving and volatility continuing to decline and converge towards global bond markets, Asian bonds are increasingly assuming the former role of US Treasuries in the asset allocation of institutional investors across Asia.”
 
Barings believes that Asian debt also offers a gateway to the Chinese economy, as Chinese issuers have become dominant players in the Asian debt markets, especially in the high yield space. Barings considers high yield Chinese bonds very attractive compared to global and regional peers as they carry shorter durations but provide higher yields. There has been a rapid growth in offshore Chinese (CNH) bond issuance. Tellingly,  the total outstanding amount of CNH bonds reached RMB 101bn as of end-April – a 58% increase from the end of last year.
 
Thomas concludes: “With Asian FX supported by strong economic fundamentals, including higher economic growth, high interest rates, better external balances and strong capital flows to Asia, the appreciation trend is firmly anchored and this will remain an important driver of future performance.”
 
Thomas joined Barings in April and is based in its Hong Kong office.

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