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Managers bullish on Asian debt
28 March 2013
Concerns arise over the potential of asset bubbles on the back of falling yields across the region
Amid continuing economic stagnation across developed markets, asset managers are tipping Asian and emerging market debt as a source of real return despite concerns over regional growth.
According to Investec Asset Management, real yields on EMD have fallen from 3.5% to 1% since the financial crisis, driven partly by more sound economic fundamentals, such as higher savings rates and falling credit and inflation risks.
Thanos Papasavvas, strategist in the fixed income & currency team at Investec Asset Management, said: “Yields have fallen across all markets raising concerns over the possibility of a new era of asset bubbles. Policymakers should be vigilant to the risks of rising asset bubbles, and not squander the fruits of their meaningful policy improvements.”
Although real yields are much lower in developed markets – Investec said they had dropped from 2.0% to -0.3% across the G7 nations plus Australia as a result of “excessive global liquidity” - they have been falling consistently in emerging markets since 2003.
Investec said continuing low interest rates in developed markets would support positive returns from emerging market debt and added it was currently more in favour of local currency, rather than hard currency, exposure.
ING Investment Management said that China's strong economy, which provides the “backbone of growth in Asia”, would be supportive of returns from Asian bonds and noted that many investors were “underexposed to the fastest-growing part of the global economy”.
Peter Sengelmann, client portfolio manager, emerging markets/Asian debt at ING Investment Management said the likely policy of continuity rather than change from China's recently installed new leadership lead to further moderate growth of around 7.5% a year in the mid-term, but warned that risks remained over China's consumer spending an property market.
“Of course, consumer spending has contributed to a high-flying property market resulting in worries that pricing has become effervescent,” he said.
While the Chinese government has tried to dampen down the Chinese property market, investors fear a hard landing, although intervention has done little other than to slow the appreciation of the market. Sengelmann added that corporate bonds from property developers “should continue to perform well in this environment, particularly as the burgeoning middle class in Asia continues to prefer property as a store of wealth”.